You probably heard an expression "trend is your friend" in Forex trading. Indeed if you have any experience in trading you find out that trading along the trend is like swimming along the stream of a river. Trading against the trend is like swimming against the stream - you may move a little but get exhausted very fast and the river will take you back. I would like to discuss some trading rules for trend following systems as well as how to identify the trend.
Sometimes it can be surprisingly hard to identify the trend for a new trader. If you have a hard time of identifying a trend I have a very simple rule for you. Go to higher timeframe of your chart and place 21-period moving average indicator. If it point up you have an uptrend if it points down you have a downtrend. So for example if you trade on 15-minute chart then move up to 1-hour chart and place you indicator there. This is the easiest way to identify the trend. I know it is not perfect but it works for me better than any other sophisticated trend indicators.
Now if you have you moving average in horizontal position I would advise you to stay out of the market. When price is choppy and market is flat it is the sure fire way to lose money by getting stopped out too many times. On the other hand when you have a strong trend then taking profit becomes a breeze.
My favorite trend following system is based on a simple rule: "buy the dips in an uptrend and sell the rallies in a downtrend". Once I identify a strong trend I place the relative strength indicator (RSI) on my chart. It actually shows you the dips in the uptrend and rallies in the downtrend. Let's say you find out on 1-hour chart a strong trend upwards. You switch back to 15-minute chart and as soon as RSI touches level of 30% you have a dip in an uptrend and you buy the currency pair. For the strong downtrend as soon as RSI touches the level of 70% you have your rally and you should sell the pair.
Remember this rule works only for strong trends. It works for me when I see the moving average have a slope of at least 30-45 degrees. Another thing to consider is that you need some way to determine when the trend is over. It's not an easy task since all indicators are lugging in time. So usually in a strong trending market I have a few winning trades and as soon as a trade gets stopped out I know trend is changing or at least it's becoming weaker. So that's a sign to stop taking trades with this system.
Albert Schmidt is a part-time currency trader. After quite a few months of struggle he learned to make consistent profit trading in Forex. Review a trading system he successfully uses in his trades. |
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