Credit: Continuing our series on Forex trading for beginners , we now look at how to determine a trend. I'm sure many of you have heard the saying at some point "the trend is your friend, until it bends". This says it all and is so true in the currency market - and any market for that matter.
Being able to determine the long, mid, and short term trends on a currency pair direction will greatly benefit you as a trader more than you can realize at this point. Trading in the direction of the daily chart while looking for entries on the lower charts is like having a strong, steady wind in the sails while in a boat race. Remember as currency traders, we don't care which direction the trend is: up or down, we just want the trend or momentum on our side.
The first thing I like to do in the beginning of my trading day is sit down and run through the daily charts of the currencies pairs I follow. Look for the strongest trend in either direction. Now since we are working with daily charts at this point, the next day will mostly present very similar results since we are dealing with strong long term trends. Do not cheat yourself and skip this step the next trading day. Looking across all the daily charts at least once a day will help you keep informed of any large moves in the market.
Below is an example of a currency pair demonstrating a strong trend.
Using the daily chart should make it easy for traders to determine if the currency pair is in a strong trend. If there is a question on whether the currency pair is in a strong trend - move on to the next currency pair chart.
Looking at the chart above we can see the EUR/GBP is clearly in an uptrend. We can verify our visual observation by confirming the candlesticks are moving from the bottom left hand corner of the chart to the top right corner of the chart. We also can confirm the uptrend by the higher highs and higher lows as it moves up toward the top right corner of the chart. The EUR/GBP is clearly in an uptrend.
An excellent beginners' strategy trading strong trends is what I call "trading support/resistance levels" and in this example we would use support levels as part of our entry point. What we look for in a strong uptrend is waiting for the price action to pull back to support. Here is the sweet thing about this strategy. You the trader, could still be working a full time job. Here's how:
Step 1: Each night after work look through your daily charts.
Step 2: Find the currency pair with the strongest trend (for this example let's use the chart above).
Step 3: Find the support level below the current price level.
Step 4: Set a buy order slightly above support.
Step 5: Set protective stop orders below the next support level.
Step 6: Set target orders slightly below the next resistance level above the current price.
That's it! Some brokers will send an email or text message when orders are executed to notify you at work that an order has been placed.
The opposite holds true for strong downtrends.
Looking at the chart above we can see the EUR/AUD is clearly in a downtrend. We can verify our visual observation by confirming the candlesticks are moving from the top left corner of the chart to the bottom right hand corner of the chart. We also can confirm the uptrend by the lower highs and lower lows as it moves down toward the bottom right corner of the chart. The EUR/AUD is clearly in a downtrend.
The same strategy trading strong uptrends can be used to sell strong downtrends. The difference is we look for a strong downtrend and wait for price action to pull back to resistance. The same 6 step process for uptrend strategy can easily be reversed and set for downtrends.
Step 1: Each night after work look through your daily charts.
Step 2: Find the currency pair with the strongest downtrend.
Step 3: Find the resistance level above the current price level.
Step 4: Set your sell order slightly below resistance.
Step 5: Set protective stop orders above the next resistance level.
Step 6: Set target orders slightly below the next support level below the current price.
Bottom Line: By trading in the direction of the daily trend, traders will have a greater probability of success with the momentum of the entire market behind your trade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
