Home » Learn Forex Trading » Trend Trading

Trend Trading

Trend trading is a basic trading strategy that works particularly well in the forex market.  In many ways, it is the archetypal trading strategy:  Try to buy low just as things are about to pick up, and then sell at or just before the peak value in a particular trend.   

The steps are simple, though difficult:  First, a trend is identified.  Next, the trader predicts where the trend is going to stop, and then holds his position until the currency either breaks the trend of reaches the pre-ordained sell point. 

The first step is generally the easiest.  In forex trading a trend is often defined as when a currency breaks out of its bollinger bands and then trends in one direction.  So, if the bollinger bands are set well, identifying the trader nearly needs to place a buy pr short order just beyond the bollinger band. 

Next, a trader needs to identify where the floor or the ceiling of the trend is.  Often, there is little rational reason to why a particular ceiling is set.  $100/ a barrel of oil, for instance, has no particular economic logic behind it, other than the immense psychological effect it has – imagine how it'd feel to turn a 100. 

So, in order to identify the ceiling or floor, the trader needs to either (a) identify how low or how high the market feels comfortable going with that particular currency pair.  Or (b) what the economic fundamentals are that will keep the market in line, regardless of the market's current psychology.       

Generally speaking, the higher the volatility in the market as a whole, the weaker the barriers. 

By the very nature of trend trading, almost all traders lose more often than they win.  When you win, you ride the trend for a good amount of money, but there will be more false starts based on misleading statistical noise than there will be genuine trends. 

So, a good defense is just as important as a good offense.  That is, it's important to trade with relatively tight stops when you're trend trading, to protect against the not-so-unlikely scenario that you are wrong.  Frequently losing much more than 2% of your capital on a given trade will make it awfully tough to make up your losses by winning big when you do predict a trend correctly.