You might have heard the phrase ‘the trend is your friend’. Well, this blog is basically us expanding on the why and how of this statement.
The idea here is that a great strategy to make consistent profits in forex is to trade according to the trend.
Here are a few tips that will hopefully help you make the most of the trends. Let’s get right into it.
Tips for trading based on trends
#1- Block out the noise
If you are trading on the 15-minute chart or lesser, you will be able to see a lot of noise. The thing about noise is that it is usually without any rhyme or reason. This makes it hard to predict and thus take advantage of.
The best thing to do is to ignore it. If you happen to fall into the noise by chance and it turns out to be a happy accident, there is no harm in it. However, don’t base your strategy on trying to make sense of it.
Your main goal should be to ride the trend. If three lower lows can be identified clearly, there is a good chance the downward move is solid. You can count on it and execute short orders.
#2- Leave room for minor deviations
As discussed above, if you are following a small time frame chart, you will see that there is in fact a lot of noise. The price might seem to be reversing. However, you have to be strong-minded in the face of this confusion.
Once you have established that the trend is indeed strong and your analysis tells you that it is not going to properly reverse any time soon, don’t pay attention to minor reversals.
In fact, you can take advantage of false reversals because eventually the market will retrace its steps back and it gives you a higher profit margin.
#3- Be smart about your Stop Loss
When we say that you should ignore the minor and temporary fluctuations, it also means being smart about your stop loss.
Setting your stop loss too close to the entry point will mean that you have made yourself too tight. If you set your stop-loss too close and there is a bit of noise and insignificant movement, your stop will get hit and before you know it you will have exited a potentially profitable trade.
If the trend is a strong one, the group in charge (bulls or bears) will eventually take control again and the market will continue in the original direction. If this happens and you have already been made to exit the trade because of a tight stop loss, it can prove to be a very frustrating situation.
This is why you need to be patient and leave some room for the market to do its own thing.
#4- Have faith in your analysis
Fundamental analysis can really inform your trading moves. If you have conducted your analysis and have come to a conclusion about the currency value move, see if the charts seem to be supporting it. If they are, you are probably right. Don’t question it too much.
This is mainly only true for swing traders and sometimes day traders too. Scalpers need to look at the smaller price movements. Day traders, swing traders, and position traders can really make use of fundamental analysis though and use it to inform their trading decisions.
In other words, you need to be a little strong-minded in the forex market. You also need to make sure that you give the market some time. Impatience in forex trading or any kind of trading proves to be harmful most of the time.
There are ways to track reversals and continuation. Take a look at our Education section to see how candles, support and resistance levels, and Fibonacci levels can help you figure out where there might be consolidation (continuation) and where there might be a reversal.
Using these tools and fundamental analysis you can simply rely on the trend and make sustainable profits from forex.
People often complicate it way more than it needs to be. The main tools you need to be successful in forex trading are discipline and an understanding of the market. These will be enough for you to have bigger profits than losses. That is the only way to truly make it in this market.