It is a known fact that trading strategies based on trend following are more profitable in general than those based on trend reversals. The only weakness of a trend following system is that it can make a few losing trades during the price consolidation period. However once trend is formed the trend following system can not only cover the losses encountered during consolidation period but it will make a significant profit.
Another benefit of trend following system is that it gives much less trading signals. This will keep a trader from losing his money. The less time a trader has an open position the less chance of losing money in market he has. Additionally a big number of opening and closing trades will cost you a lot in spreads. The biggest problem is to identify the trend. When we look at the historical price data it is obvious where it was trending. But it is a difficult task to decide if a current movement is a beginning of a new trend or just a correction. There is no approach that can give your 100% accurate answer to that question.
That's why entering the market you need to place a stop-loss order. Otherwise any movement against your position may become a market reversal that can wipe out your account. The next thing you need to do is to identify a short term partial profit level. You need to take a partial profit before you will let your position run with the trend. In other words your trading has all signs of short term trading based on small losses and small initial profit. Many successful traders follow these rules because they are more psychologically favorable in making profitable trades.
There is endless number of tools that are used to identify the trend. I would like to discuss a tool based on three indicators. It is ADX - Average Directional Index. This indicator is based on calculation of the price range changing. It is technically formalized definition of the trend.
Trend is up if price have increasing series of consequent maximums and minimums. Trend is down if price have decreasing series of maximums and minimums on the chart. In the first case the range (from high to low) tends to move upwards. In the second case the range tends to move downwards.
So how do you exactly use this indicator? Open your charts and attach ADX indicator to a currency pair. Now watch for negative directional indicator (-DI) and positive directional indicator (+DI). If -DI crosses above the +DI that is a signal for the beginning of a downtrend. If +DI crosses above the -DI that signals the beginning of an uptrend.
Albert Schmidt is a part-time currency trader. After quite a long time of struggle he learned to make consistent profit trading in Forex. Review a trading strategy he successfully uses in his trades. |
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