I read all the time that you have to trade with the trend. But how do you know that a currency is in a trend and isn’t just a momentary blip?
That is correct, it is much easier to trade in the same direction as the trend rather than against the flow. You may have heard the saying “the trend is your friend” and this definitely holds true for trading in the financial markets and especially the forex markets, and if you can go with the trend then it will make your trading performance much more profitable.
The key here is to identify whether the currency pair is in a trend, and using trend lines and applying these tools to your charts in your trading platform will help. Your trading platform should have a range of trend line functions to allow you to draw support and resistance levels, and identify trading ranges that will help you to identify whether a currency pair is within a trend or not.
As an example, if a currency pair is moving in a strong uptrend, then it can be characterized as a series of higher highs and higher lows. A currency pair moving in a down trend will be shown as a series of lower highs and lower lows. These can all be identified by making the most of your charting package to spot whether the movement is contained within a range or if a breakout has occurred.
The good thing about the FX market is that if the trader is not sure whether a certain pair is in a trend or consolidating, then there are plenty of other currency pairs to analyse.
Additionally there are a series of technical indicators the trader can use to back up the analysis – for example, moving averages are a very popular tool for spotting the momentum behind a currency pair.
There will always be “noise” around movement and the challenge is to eliminate the noise not be tempted to enter into or exit a trade too early – moving averages will help here as they can eliminate the noise and erratic short term movements.
My suggestion would be to find a timeframe that suits you, such as an hourly chart, use the trend line tools in your charting package to good effect to identify whether a currency is within a range or it has broken into a new range, and back this up with technical indicators.
This will give you more confidence in determining whether a currency pair is in trend or not.
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