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How to Trade on a Trend

5:29 PM Nov 27, 2019
1116
Forex trading

A huge number of Forex strategies are somehow connected to a trend. And this is not surprising. After all, when you see where the market is moving and know when it’s ready to change its direction, your trading decisions become more thoughtful and will more likely bring you profit.

You will need a few things to start trading on a trend:

  • Learn to determine a trend
  • Pick a trading style
  • Choose a trading strategy

In one of our previous articles, I’ve already told you what a trend is and how to determine its direction. We will not delve into this topic again. I will tell you more about the trend trading itself.

3 Steps of Trend Trading

Just like in any other strategy, trend trading is performed based on a clear plan, that you need to build in advance. The steps included in your plan are pretty simple:

  1. Determine trend direction
  2. Identify entry points for your order
  3. Mark the exit points - Stop Loss and Take Profit levels

Trading on Breakouts

There are many methods of trading on a trend, such as trading on the moving average, on the resistance and support levels, on channels and trend lines. We can’t go through all the methods in one article, so today we will focus on a specific method - trading on breakouts.

The essence is pretty simple - you make an assumption that the trend will change its direction and cross the key price level. For example, in an ascending market, the price constantly bounces off the support level or trend line. Your task is to catch the moment when the price makes a clear break below the set level and the market begins to fall.

There is one huge benefit in a breakout strategy. There is no need to manually open a trade at a perfect trading setup. Once you make a conclusion that the trend is ready to reverse, you can place a pending Entry order. When the chart reaches the specified entry price, the position will open automatically.

You can never be 100% sure that the price will go in your direction. That’s why it’s crucial to set Stop Loss on each of your orders. In trend trading, it is usually set around the closest high or low, depending on the market direction. Also, make sure to determine the exit point for a potentially successful trade, so make sure to set Take Profit.

Remember that before entering the trade you should evaluate the profit and risk ratio. When you have decided where you’ll place your SL and TP levels, check if the potential profit exceeds the risk size. The ratio of risk to profit should be at least 1:2 or even 1:3. For example, if you risk losing 100 pips, then the profit should be at least 200 - 300 pips.

How to Determine a Trend Change

You definitely can’t place a pending order around every swing point you see. You would sit endlessly looking at your screen and make calculations. It’s much more convenient to analyze the situation in the market and determine the strength of the trend. Once the trend begins to weaken, it is likely to change its direction.

There are three main ways to determine trend strength:

  1. On highs and lows
  2. On the frequency of swings
  3. On clustering of the price around the trend line

Highs and Lows

This one is simple. Just look at the chart and see its highs and lows. When you notice that the low has increased or the high has decreased, the trend has lost its strength and will most likely change direction.

Swing Frequency

You can indicate the strength of a trend depending on how often the price returns to a set trend line. If the pair keeps returning to a key level more and more often, then the trend began to weaken. So let’s say, at the beginning of a downtrend the price touched the trend line once every 40-30 days, and now once every 5 days. In this case, the market will most likely change its direction to sideways or upward.

Clustering Around Trend Line

This method is very similar to the previous one. If the price starts to “vibrate” around the indicated trend line, then most likely the chart will reverse. It is worth considering setting a pending order.

Final Words

Trading on price action is the most reliable way of trading. When you analyze the chart on an ongoing basis, you begin to understand and make better predictions about the behavior of a price in a particular situation. If you want you can use indicators for trend trading, but then you are less likely to start feeling the market just like a professional trader.

Whatever method of trading you choose, remember that during the news releases the market can behave unpredictably. Go through the economic calendar before you start your trading day and avoid the market around the major news.

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