Trading with the trend is one of the safest ways of engaging the financial markets and a great strategy for maximizing profits. Many analysts use trend trading strategies as one of their primary approaches to the markets. In addition, before making a trade or issuing a signal, they always confirm which side of the trend they are on. Meanwhile a significant portion of traders have incomplete knowledge of why trends form in the Forex market.

There is saying in the Forex market is that “the trend is your friend”. Let’s learn about the key phases of the market movement and check out the strategies of trend trading in this article.

Trend Trading

Trend trading is a strategy that involves using technical indicators to identify the direction of market momentum. It is based on the idea that markets have an element of predictability. Analyzing historical trends and price movements a trader will be able to forecast what could happen in the future. Trend trading strategies are designed to help you identify trends as early as possible and exit the market before they reverse.

Trend trading strategies

When trading a trend-based strategy, traders usually pick the major currencies as well as any other currency utilizing the dollar because these pairs tend to trend and be more liquid than other pairs. Liquidity is important in trend-based strategies. The more liquid a currency pair, the more movement (Liquidity) we can expect. The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges. Other than eyeballing price movement, you can make use of technical tools can determine whether a currency pair is trending or not.

1. ADX trend Strategy

Using the Average Directional Index indicator or ADX you can determine the market is trending. It is developed by J. Welles Wilder, this indicator uses values ranging from 0-100 to determine if the price is moving strongly in one direction, i.e. trending, or simply ranging. If the Values are more than 25 usually indicate that price is trending or is already in a strong trend. The higher the number is, the stronger the trend. However, the ADX is a lagging indicator which means that it doesn’t necessarily predict the future. It also is a non-directional indicator, which means it will report a positive figure whether the price is trending up or down.

Here we have given example for ADX trend indicator showing an Uptrend

Price is clearly trending upwards even though ADX is lesser than 25.

2. Simple Moving Average Crossover Strategy

A moving average crossover is another way to identify a trend. Many investors view currency pair exchange rates on a chart that tracks a moving average. A crossover occurs when a short-term moving average of a currency pair price increases above or declines below a longer-term moving average of a currency pair price. For example place a 7 period, a 20 period, and a 65 period Simple Moving Average on your chart.

Here we have given example for Moving Average trend indicator showing an Up and downtrends.

When the three SMAs compress together and begin to fan out will create a trend.  If the 7 period SMA fans out on top of the 20 period SMA and the 20 SMA on top of the 65 SMA, then the price is trending up. On the other hand, if the 7 period SMA fans out below the 20 period SMA, and the 20 SMA is below the 65 SMA, then the price is trending down.

Downtrends can be confirmed when the price is in the sell zone. Uptrend’s can be confirmed when the price is in the buy zone. There are quite a few ways of quantifying a trend. Many traders like to rely on indicators such as moving averages to assist with identifying these trends.

Conclusion

Trends are essential for traders to be able to make money in the Forex markets. Without a trend, obtaining profit would not be possible which is why correct understanding of how trends are created in the market is essential in your ability to not only making profits, but to time trade entries and exits. There is never anything concrete with trend, meaning you never know how long they will last for, so try to take advantage of them when they do occur. Trend trading is the most popular trading strategy used in the financial markets and it involves identifying long-term tendencies either higher or lower.

Before we build a strategy, we first need to get comfortable with an inevitable fact: no trading strategy will work all the time. Trend following is not a short-term method, and patience and determination are as important as correct analysis as a result. Based on fundamentals, technical and future market news will exhibit distinct “flavors,” or conditions, at various times.

Finally the truth is you’ll never know for sure. That’s why you must always have a stop loss and manage your risk properly.