Trading Trends in the Forex Market

Trading Trends in the Forex Market

One of the most probability approaches for taking advantage of the frequently occurring trends in the foreign exchange market on any time frame will be described briefly here. When there is a clear trend, especially one that is relatively strong, one of the best strategies for exploiting the prevailing directional bias is to trade breakouts of both consolidations and countertrend retracements, all in the direction of the current trend.

How does one know that a trend is in place for the chart timeframe one is viewing? There are many methods, the most common of which include: trendlines, slopes of moving averages, correct order of multiple moving averages, Average Directional Index (ADX), visual estimation of relative highs and lows, higher timeframes, etc.

Once the existence and strength of a trend are established, the trader can then watch for one of two key price action events. One of these events is price consolidation areas within the trend. This could be a chart pattern like a triangle, flag, pennant, rectangle, wedge, or similar. Or it could just be an instance where price is moving up and down in a tight range-like situation within the context of a trend. The bounds for any consolidation can be established using chart drawing tools (trendlines, horizontal lines, etc.). This creates support and resistance lines that can be used as potential triggers for trend trading entries. Trades can then be placed if price breaks out of consolidation in the direction of the prevailing trend.

Similarly, another key price event to watch for besides consolidation is countertrend retracement. Even strongly trending currency pairs will almost invariably have numerous instances of countertrend retracement/correction (where price pulls back against the trend before ultimately resuming the trend after the retracement/correction). When price makes a countertrend retracement in this fashion, a countertrend trendline can then be drawn. For example, for a countertrend bearish retracement within an overall uptrend, a downtrend resistance line can be drawn to represent this retracement. Likewise, for a countertrend bullish retracement within an overall downtrend, an uptrend support line can be drawn to represent this retracement. Any breakout against these countertrend retracement trendlines in the direction of the prevailing trend can be used as potential trend trading entry triggers.

In order to be truly effective, this straightforward approach for trend trading in the forex market should be accompanied by strong risk and money management principles, along with dynamic profit-taking practices. When trading in this manner, one may properly take advantage of the many substantial trend moves that occur frequently in the forex market.

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