Every trader worth their salt has heard of the expression “the trend is your friend, until the end when it bends.” Trading with trend lines is an incredibly simple yet necessary method you should implement into your trading plan.
One of the trademarks of professional true ECN and STP brokers is the ability to correctly identify trends, which increases their chances of making successful trades. If you want to trade like them, then this is a skill you should hone.
You can spot a trend by keeping an eye out the price of a currency pair that’s moving in a distinct direction over a continuous period. Although it doesn’t guarantee success every single time, it does slightly increase your trading performance. Here’s a brief guide that explains how to spot trends, and how to use them when trading.
The following are some methods you should use to identify trends:
Moving average crossover
The moving average is a calculation that levels out price data by averaging all price fluctuations into one line to create an average price. A moving average crossover happens when two moving averages cross over each other. These crossovers point to either an uptrend or downtrend that may be happening.
A downtrend is also called bearish, and is identified by a series of falling lows and highs where each successive low and high is lower than the prior one.
An uptrend is also known as bullish, and is denoted by a progression of rising lows and highs where each consecutive low and high is higher than the preceding one.
Price action is the analysis of the history of a price’s basic movements. This information makes it possible to forecast a price chart based on the past actions of the price.
Horizontal trends are also called flat. They don’t have distinctly noticeable downward or upward lines, but rather tend to look frenzied or arbitrary in their placement. Sometimes, they also appear at the same level or are completely horizontal.
With this in mind, you can now use these to your advantage by trading the trend. Here are several strategies to consider:
- Locate the trend using the aforementioned methods and indicators.
- When you notice a trend, check if the price consistently touched the support line at least three times in an uptrend and subsequently rose during an uptrend. If it did, then this means it’s the best time to buy.
- Plan your strategy to enter the market. Using a breakout is a common and easy way to do so.
- Pay attention to real-world events that are influencing these trends. Follow the news for updates on national trade, interest rates, government policies, inflation, and production rates.
- Verify the trend by checking all of its technical indicators.
- Identify which stage the trend is at. If the trend just entered or is already making its exit, it’s advisable to wait first or pick another, more mature trend.
- Place a stop-loss order at about 15 pips or 1/3 of the potential take profit.
Make the most out of your money by keeping these strategies and methods in mind to ensure that your experience is successful.