Trading Trends in the Foreign Exchange Market

April 26, 2019 14:00 UTC
Reading time: 7 minutes

As a trader, I'm sure you've often heard the phrase "The trend is your friend". Indeed, it has become a cliché, but such expressions have built up their reputation over time because they are of crucial importance in any trading plan. In this article, we will teach you how to identify trends using price action analysis.

Before you start, it's very important to explain why this strategy, where trading is done in the direction of the dominant trend, is so popular and used by experienced traders as well as those who are at the beginning of the road. Experienced traders know that identifying a well-trained trend and trading in the direction of it makes trading much easier. For this reason, they are always looking for strong, clearly defined trends so that they can profit consistently from them.

For a better understanding of this, I'll give you a simple example: if the market climbs strongly in a well-defined trend, the strategy used to enter the market is not so important, the idea is to buy. This does not mean that all open transactions will be profitable, I want to emphasize that once you have found a strong trend and you are trading in the direction of it, you do not have to be exactingly precise in terms of entries and exits.

Second, by trading in the direction of the dominant trend, on the impulse, you will be able to stay on the market for a longer time, and implicitly your profit will be higher.

Because this article is intended for beginners, my advice is not yet to consider trading against the dominant trend! The idea of catching a global market correction is tempting, but countless traders have tried this approach and failed.

Source: MetaTrader 5

 

Source: MetaTrader 5

 

From the two charts above, you can see that there are more points (pips) that you can profit by trading in the direction of the trend (ascending or descending), not against it. By trading in the direction of the dominant trend, it will actually align the trading strategy with the price action at the moment of the market.

 

How to determine the direction of a trend

To properly identify a dominant trend, we need to observe the overall picture. For this reason, I recommend that you open a chart of a financial instrument on the Daily or Weekly timeframe and then answer the following question: What direction is the market moving?

If the trend is rising upwards, you need to confirm its direction by looking for the higher lows and higher highs. If the higher lows and higher highs are rising – this is the definition of an uptrend.

Source: MetaTrader 5

 

A valid uptrend should be similar to the one shown below:

At some point, any trend will end. Therefore, this uptrend will turn into a downtrend when a series of lower highs and lower lows will appear on the chart.

If the trend is descending, you need to confirm its direction, looking for lower highs and lower lows. Lower highs and lower lows define a downtrend. The chart below shows a valid downtrend:

Source: MetaTrader 5

 

This downtrend will change in an uptrend when a series of higher lows and higher highs will appear on the chart.

 

Conclusion

It is important to emphasize that there are no set-in-stone rules to identify the lows or highs and to immediately apply them to trend analysis. For profitable trading, the idea is to choose and trade the clearest and most obvious examples of ascending and descending trends.

Admiral Markets Group investment firms will provide you with a wide range of financial instruments that you can trade and for this reason, I insist on looking and trading only those instruments that have clearly defined trends. If you are not sure of the direction of the trend of a particular financial instrument or the market is in a consolidation period, then focus on other charts.

Do not forget, filter the market signals in the direction of the dominant trend and ignore the signals that are against the trend (corrections of the trend)!

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