In everyday speak, a trend is the hottest pair of sneakers or that must-have cell phone. It has become a marketing term that means the latest, greatest and cutting edge item you can buy. In Forex speak, trend sticks closer to the words root meaning which is a direction that something is developing in changing in.
When looking at a Forex chart, you are going to see one of two trends. The pair is going to be moving up in value, or it’s going to be coming down. Once in a while they might seem to be flat-lining, but if you step back and look at a larger time frame chart, you will most likely find an up or down trend, albeit a very slow moving one.
So What’s the Big Deal in Spotting the Trend?
When starting out as a new Forex trader looking at charts, the very first thing you are going to be taught how to do is spot the trend. Because if you can’t figure out if your pair is gaining value or losing it, how are you supposed to trade it? With Forex trading you don’t want to place your trades against the tide of the currency pair, that’s the equivalent of trying to head upstream without oars. In order to ensure that your investment grows, you are always going to need to trade with the trend.
Identifying Trends
You are going to have to start reading long-term charts to identify trends. Day traders work with smaller time frames, full of peaks and valleys from quick turnarounds. These are not trends, but short market fluctuations usually resulting from an unexplained sudden buy-in or sell-off of the pair. The trend is what the currency pair is doing over the long haul.
Mapping it out is easy. First, you need a long term chart or even mid-time range chart. Then look for the extreme low prices or the extreme highs and connect those two points with a line. Reading the chart from left to right, if the line is angled up, the currency price is rising with it. When the line is on a downward angle then the currency is on a downward spiral.
If you don’t want to map it out with a pencil, just look carefully at those quick turns to see. If the highs and lows at the turnaround are getting higher with each one then the trend is moving upwards. A series of lower highs and lows is a downward trend. See, this is not rocket science. Once you see how easy it is to spot the trend you will kick yourself for missing it in the first place.
Now That You Spot the Trend, What Are You Going to do About It?
Well now you are going to trade with it of course. This is why I always recommend new traders get their feet wet with long term plans instead of day trading. If the trend is showing that despite those daily ups and downs the currency is typically closing higher than it opened, then ride that current. Enter your trade with an exit a few days off and let your money rise with the trend. So long as you don’t place your stop loss order to be too be close where some of those quick turnarounds are, your money is going to weather those fluctuations and still come out ahead at the end of the day.
Not Really Sure About That Stop-Loss Order?
If you aren’t using the stop-loss order with your trades, you need to start, but you have to do it right. A stop-loss will automatically put the oar in the water to stop your money if the pair starts trending in the other direction for too long. Be careful where you put it though otherwise it will also stop your trade during a quick turnaround if you place the amount you are willing to lose too low.
Trading With Trends
Just because you figured out how to read the trends now, it is not enough reason to just jump in and start trading one. Spotting the trend and trading with it does not make a strategy. All trading with the trend is doing is increasing the chances that your strategy will work.
This type of trading is what I recommend for new traders to start out with. Simplistic, yet it allows for you to make some money while learning more about the forces that move the market. With trend trading, you have little concern about predicting when the market is going to change, so long as you have your stop-loss order in place.
There are a lot of theories and guides to trend lines and trading with them that you are going to come across as you get more knowledge and confidence in the market. Some of these break one of the cardinal rules of successful trading: Keep it simple. Over-analyzing and using too many tools can be just as detrimental as not using any. Pick one or two indicators only to use in conjunction with your trend spotting to base your strategies off of.
You are going to be inundated with tons of information to process and learn how to use in your first months trading Forex. Give your brain the energy it needs to sift through and understand it all by keeping your initial trades as simple as possible. This can be done by looking at your long term charts, mapping the trend, and then placing a long-term trade that takes advantage of it.
Casey Stubbs is the founder of WinnersEdgeTrading.com which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.
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