Trends Strategy – Advantages and Difficulties
When markets rise or fall over a period, it is called trending. The longer the period, the stronger the trend is.
Trends are the main reason why traders come to financial markets to speculate. A Forex trading system that follows a trend benefits from the constant upward or downward pressure until the trend reverses.
What Makes a Trend
Before discussing more about trends and trending markets, it is essential to give a proper definition of a trend. When it rises or falls, the market doesn’t do it in a straight line.
Instead, in a bullish or rising trend, there’s always a set of pullbacks or corrections. The same is valid during a bearish trend; the market will always pulls back from time to time, sometimes more aggressive, sometimes only timidly.
These pullbacks are the metric for measuring a trend, and the definition of bullish and bearish trends looks like this:
- a bullish trend keeps forming as long as the market builds a series of higher highs and higher lows
- a bearish trend is in place and will remain as such for as long as the market makes a series of lower lows and lower highs.
In other words, any pullback in a trend is normal, with the condition that it doesn’t exceed the previous lower high (in a bearish trend) or higher low (in a bullish trend).
The Problem with Trends
As always, there’s a problem. The Forex market is one that consolidates most of the times, with statistics showing ranging occurring in over sixty-five percent of the cases.
However, despite the odds of Forex being against finding strong trends, the chances are that the trader that digs in will have bigger opportunities to apply a trend’s strategy. The explanation comes from the fact that each currency pair is, in fact, a market.
Moreover, if one breaks down a currency pair in multiple timeframes, he/she will discover many trends of various degrees. For instance, the daily timeframe may show a range for the last two weeks, but on the five-minute chart, small trends do form, and traders can benefit from them.
After all, it is all about the volume traded and not the distance the price travels, that makes traders profitable over long periods of time.
Best Trend Indicators and Strategies
Any trading platform offered by a Forex broker provides plenty of trend indicators to use. They all show the same thing: where is appropriate to buy dips in a bullish trend or to sell spikes in a bearish one.
Here are some trend indicators to consider:
- moving averages
- Bollinger Bands
- Parabolic SAR
Also, trending tools like trendlines and channels help traders identify a trend, and find support and resistance levels where to enter the market.
Forex education guides explain more about market trends and the tools to use. For instance, there are multiple types of moving averages (e.g., Exponential Moving Averages – EMA’s), and traders use different periods when plotting them. The bigger the period and the timeframe, the stronger the support or resistance the price will meet.
All in all, a trend’s strategy gives traders entry and exit when riding a bullish or a bearish trend. The difficulties of riding trends come from their rarity, rather than lack of tools to trade them.