Trade With The Forex Trends
- Forex trends are price movements which most traders follow
- The trend can be upward or downward
- Trends can be measured by dozens of different indicators
Forex Trend Trading Is Your Friend
You’ve probably heard of the expression “the trend is your friend until it bends”. But you might wonder whether the trend is really that important. Or is it overhyped?
Although some traders believe that trends are too slow for trading decisions, most experts agree that the trend offers key information about the overall direction of the price chart.
This Forex trend trading guide explains why it’s useful to trade Forex with trends and adds Forex trend trading tips. In other words, Forex trend trading is reviewed for you from A to Z.
In this Forex trend trading guide, also try to share some tips on how to set up hopefully one of the best Forex trend trading strategies.
What Is A Trend In Price Charts?
Trends are a form of technical analysis. They often appear on the price charts of financial instruments. Many traders focus
A trend indicates that one side has been stronger than the other. There are many trend trading strategies in Forex. But first, it’s needed that Forex trend trading is explained.
Basically, price movement favors one of the two directions:
An Uptrend Is Bullish
- Price action was lower in the past but has been moving higher recently.
A Downtrend Is Bearish
- Price action was higher in the past but has been moving lower recently.
A chart does not always have a trend. The chart is in a range (and lacking a trend) if price action is going sideways and flat.
Many traders trade Forex with trends, either with the trend or against the trend. Trend trading Forex is often used.
Here is a key Forex trend trading tip: a trader can find a trend by looking for particular price action patterns (more on-trend methods later in this article) for both up-and downtrend.
Higher lows (HL) and higher highs (HH):
- See the blue arrow for the uptrend in the image below.
- Blue boxes indicate the HHs and HLs.
- Some exceptions might occur but mostly HL and HH are visible.
Lower highs (LH) and low lows (LL):
- See the red arrow for the downtrend in the image below.
- Red boxes indicate the LLs and LHs.
- Some exceptions might occur but mostly LL and LH are visible.
Usually, traders analyze trends on a one-time frame higher than their entry time frame. For instance, a trader using the 1-hour chart for entries often uses the 4-hour chart for determining the best forex trend trading strategy.
There is no fixed rule for trends and any time frame can be used for spotting the trend. Just keep in mind that trends on higher time frames are typically seen as stronger.
Using trends allows traders to better understand charts and improve their trading decisions. Let’s now discuss the main benefits of Forex trend trading strategy.
What Value Does Trend Trading Forex Offer?
The trend offers multiple benefits for trading price charts:
The trend offers various phases and can be split into different cycles:
- There is a trending phase (orange arrows in the image below) when the price action moves with the trend (red arrow).
- There is a pullback phase when the price action goes mildly against the trend (green arrows).
- There is a retracement phase when the price action goes stronger against the trend (purple arrows).
- There is a reversal phase when the price action goes fully against the trend and the old trend is finished (blue arrow).
- Then there are moments when no trend is visible and price action is in a range or consolidation.
Forex Trend Trading Offers Discounts:
- Why? The trend moves up or down in phases. This means that pullbacks and corrections are common and visible within a trend (see point 1).
- These pullbacks offer a discount to traders.
- This means that traders are able to join the trend at a better price level.
Higher Probability That A Trend Continues In The Same Direction:
- A trend has a high chance of continuing due to market psychology.
- Market cycles tend to repeat. Why? Because after traders see a pullback, they buy or sell with the trend to receive their discount (see point 2). These trades push the trend again in the same direction.
Traders Can Avoid Weak Setups Against The Trend:
- Some setups might look good but not anymore if traders consider the direction of the trend.
- Keeping an eye on the trend can help avoid weaker setups and is an excellent filter.
Great Tool To Add In Your Analysis Together With S&R And Price Patterns:
- The trend is not the only important aspect of technical analysis. But it is critical to combine the trend with support and resistance and price patterns.
As you can read, there are plenty of reasons to analyze the trend and to add them to your trading plan.
Let’s now move on to the next question: we will list the tools and indicators which are best used for determining and understanding Forex trend trading.
What Are The Best Forex Trend Trading Tools For Price Charts?
There are many different methods for analyzing the trend. This article will focus on a couple of methods that offer quick and simple help.
Let’s start with the simplest ideas and gradually move to more complex methods:
Compare The Right With The Left Side Of The Price Charts.
Is a chart trending? A very simplistic way of analyzing the chart is simply to look left. If the current price is above or below the price further back in the past (on the left side of the chart), then probably price action is trending up or down.
Although traders enjoy its simplicity, this method fails to capture more information about the trend such as the trend’s strengths or weaknesses.
Also, traders need to realize that this method is vulnerable to change depending on the level of zoom. A trader that zooms in will see the price from much closer than a trader that zooms out. This will create different perspectives on Forex trend trading. Usually, a balanced viewing point is used by most traders.
Use Higher Highs And Higher Lows And Lower Lows And Lower Highs.
The classical way of analyzing trends is via higher highs and higher lows for an uptrend and lower lows and lower highs for a downtrend.
Although this method has been used for a long-time, it still remains valid today. The idea is quite simple: it requires a little more research to figure out what can be considered a top or bottom.
For that purpose, it could be recommended to use the Fractal indicator (in MT4 click on insert, indicators, Bill Willams), which helps identify stronger tops and bottoms and remove weaker ones.
Use A Mixture Of Moving Averages.
A mixture of short-term, medium-term, and/or long-term moving averages helps provide more context about the trend strength.
Although the moving averages make the chart more complicated, the good news is that the moving average tool is fully automated. Hence, traders do not need to take any manual action before using them.
Another positive is that the moving averages offer traders a quick way of checking the state of the trend:
Alignment: are all the moving averages aligned in 1 direction?
- Bullish: short-term is above the medium-term which is above the long-term moving average.
- Bearish: short-term is below the medium-term which is below the long-term moving average.
Space: the more space between the moving averages, the stronger the trend.
- If moving averages are further away from each other, then the trend is pulling price action strongly up or down.
- If moving averages are close to each other, then the trend is not pulling price action up or down.
Angle: a strong angle indicates a trend
- A steep bullish angle of the moving averages indicates a trend.
- A flat angle indicates that the trend is slow or not present (range).
Price vs moving averages: is price action aligned with the moving averages?
- When price is above the moving averages can indicate a confirmation of the uptrend.
- When price is above the moving averages can indicate a confirmation of the downtrend.
Use A Trend Channel To Capture The Trades With Forex Trends.
A trend channel is probably the most difficult method. Why? Simple because traders need to draw the channels themselves on the chart.
The tool can be automatized but in most cases, trend channels are still drawn by the trader themselves. And there are some good benefits for drawing the channels yourself.
Drawing trend channels is a good way of learning to understand price charts. It allows traders to get more practical experience when analyzing prices.
Trend channels are able to capture the tops and bottoms and connect them into a long-term channel.:
- The bottom of the uptrend channel acts as a potential support zone. This zone could be interesting for potential long setups and placing stop losses.
- The top of the uptrend channel acts as a potential resistance zone. This zone is good for potential targets.
- The bottom of the downtrend channel acts as a potential support zone. This zone is good for potential targets.
- The top of the downtrend channel acts as a potential resistance zone. This zone could be interesting for potential short setups and placing stop losses.
Keep in mind that the best trend channels should not be too steep or shallow. Shallow trend channels are arguably not a trend if the angle is too flat. And steep trend channels are too steep for the trend to be sustainable.
Usually speaking, most traders consider trend channels with angles of 20-45 degrees to be the most balanced and useful in determining the trend channel.
Last but not least, traders can draw multiple channels on the chart – as long as price action respects the lines and has a decent angle.
What Did We Learn From This Article On Trends?
Here are the main learning lessons on this article on trends:
- Basic explanation of how the trend works, how to trade Forex with the trend, and Forex trend trading explained.
- The main benefits and value of spotting and using the trend.
- Why lower lows and lower hig