The trend is a trader’s friend

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Tips Every Forex Trend Trader Should Know

They say the trend is your friend. Or, ride the trend until its end. But, what should a trend trader do to ride a Forex trend?

Everyone wants to trade trending markets. The problem is that trends do not form that often. However, there’s a catch!

Even if a currency pair ranges on the bigger time frames, on the lower ones small trends appear. As such, a Forex trend strategy gives results on lower time frames while the market consolidates on the bigger ones.

The biggest enemy to a Forex trend is the trader himself/herself. Do you know the reason why most traders fail? They can’t handle the market heat. Fear and greed take control over their decisions.

Therefore, instead of letting the profits run, retail traders settle for small wins. However, when it comes to cutting the losses quick, the reaction differs.

As a rule, traders find it extremely difficult to cut losses. But, equally difficult is to let the profits run.

A trend trading strategy must let the profits run. Moreover, Forex trends reversals must be part of such a strategy.

In Forex trading, any strategy without money management rules won’t survive the test of time. If traders start with the intention of buying the absolute low or selling the absolute high,
they’ll fail.

Forex trend signals do not differ than reversal signals. From a money management point of view, they’re the same. Furthermore, combining a Forex trend approach with reversal strategies will make the trend trader a complete trader.

The aim of this article is to show a few tips and tricks when trading a trend. The examples used here will help you understand how to ride a trend. And, how to trade its end.

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What is a Trend in Forex Trading?

When the market, or the price, moves, the market trends. The longer the move takes, the stronger the trend is.

The bigger the time frame is, the stronger the implications for that currency pair and for the entire Forex dashboard. Imagine, for example, the EURUSD drops two thousand pips in a strong trend.

Because this is the most important currency pair, the implications go beyond it. Other U.S. Dollar and Euro pairs will adjust their rates.

Forex trend trading as a strategy considers the way the market moves. A trend trader will look at clues the market makes. These clues help to define the overall Forex trend.

Lower Highs and Higher Lows – A Forex Trend’s Definition

The first clue that a market forms a trend comes from a very simple sequence: lower highs or higher lows. Any Forex trend trading strategy should start from this point.

A Forex trend continues with the market moving relentlessly in the same direction. Trends may look aggressive on the hourly chart. But, on the daily, or higher, the market may simply correct.

Traders that have a trend trading system always pay attention to this higher lows/lower highs series. As long as the series holds, the trend goes.

Earlier in the article, I explained why retail traders fail to be trend followers. Many think they ride the trend. But, they’re not!

The problem comes from the time frame. People don’t have patience. Forex traders don’t have patience at all. This is normal because they deal with money.

Whenever money or a possible profit gets involved, things get messy. A trend trader’s first task is to have a different Forex trend approach to different time frames.

To this, I would add that a proper Forex trend analysis involves both patience and discipline. Regardless the time frame.

Such a simple thing like the break of a lower highs series in a bearish trend makes a difference. Until it happens, you simply ride the trend. No matter what!

Above is the EURUSD daily chart that shows the drop from 1.40 all the way to almost parity. What a trip it was!

The funny thing is that it happened in less than a year. All this time, Forex trend followers should’ve done nothing. Or, nothing but let the profits run and enjoy the run.

No spike higher took the previous swing’s highs. Hence, the trend was still alive and kicking.

If you consider the time frame (daily!), there’s a scope for tremendous profits. And the pair didn’t disappoint.

Trend Trader – The Two Points Strategy

Any trend trader must follow this rule: A Forex trendline gives the trend. In plain English, the trend line represents the line of the trend. Hence, you mustn’t ignore it.

Consider the earlier chart for a second. It shows three Forex trend lines in three different colors.

The black one is the main one. As long as the price stays below, bears should not worry.

Moreover, a trend trader knows a trend will, eventually, the end. As such, he/she will look for clues to spot the trend reversal.

The two points strategy consists of…you guessed it, two points! A trend line needs only two points.

The thing to do is to connect the two points (in this case, the two lower highs) and drag the trend line further on the right side of the chart. Trading is easy until a Forex Breakout in the main trend occurs.

Aggressive traders always look to buy the dip or sell the top. But, without a money management system, such an approach will end up failing.

The blue line in the previous EURUSD chart shows an even stronger/sharper trend. Keep in mind that we talk about the daily time frame.

The red one shows even a sharper one! Now, step back a bit from this chart and imagine you sold from 1.40.

Or, to keep it realistic, imagine you sold from the moment you saw the two points (the two lower highs) and the previous swing’s lows were broken. And you kept the position all the way until the red trend line gets pierced!

How about that for a trade! Nevertheless, if you’re honest with yourself, as a retail trader, you won’t normally trade like this.

Why not? Isn’t this a nice Forex trend system? Of course, it is. But, again, the problem comes from the execution part.

Riding a Forex Trend

One of the biggest problems a trend trader faces is related to timing. When is the best time/place to enter a trade?

The classical Forex trend following strategy says that you should buy the dip in a bullish trend. Or, sell the spike in a bearish one.

This sounds like a cool advice. But, can we have some rules? Can we, as traders, put this in some sort of trading plan? Can we have a clear entry, stop loss and take profit level, while still riding the trend?

The answer is yes. Forex trend trading strategies must follow a money management system. Without it, trading is useless.

Look for a New High/Low

A trend trader has more patience than the regular retail trader. Scalping is not his/her thing.

When riding a Forex trend, every step is a planned one. When to buy or sell? A trend trader knows in advance the answer to these questions.

Let’s go back to the two-point strategy mentioned earlier. A Forex trend line strategy starts with these two points.

After drawing a trend line, all eyes should be on the moment the price pierces it. When this happens, traders face two outcomes:
– the trend line’s break could be fake.
– the trend may reverse.

How to distinguish between the two? Moreover, how to make sure the trend still runs?

Simply look for a new high in a bullish trend. Or, a new low in a bearish one.

The USDJPY weekly chart above shows how to do that. The steeper trend line (the first red line) shows the original trend trading strategy. In a bullish Forex trend like this one, a trend trader wants to buy.

Buying takes place either from lower or higher levels. Never be afraid to buy new highs!

Buying a new high means buying strength. Traders go long when new opportunities arise.

In the case above, after the two Forex trendlines show how to do it. Wait for the price to break the first one, then look for a new high.

Buy that high, place a stop loss at the previous swing’s lows and use an appropriate risk-reward ration. For the Forex market, anything between 1:2 and 1:3 works.

However, you want to make sure you stay in the trend. Hence, book half profits at the risk-reward ratio level, and trail the rest. This way, you’ll end up riding the trend until its end.

Where to Add to a Position – A Trend Trader’s Dilemma

Every trader faces this problem. What is the best place to add to a position?

If the trend is strong enough when to buy/sell without meaningful drawdowns? One Forex trend following strategy helps.

The way to deal with this is to use an oscillator. Any oscillator will do. However, the RSI Technical Indicator works amazing!

To make sure the Forex trend following works, simply use the overbought or oversold levels to add to a position. The Forex trend in the chart below starts with the first two points that give the Forex trend line trading strategy.

The EURJPY above illustrates the strength of this strategy. By connecting the two points, you’ll have the trend line. If you project it forward on the right side of the chart, it gives the overall trend.

The RSI, in this case, acts as the best Forex trend indicator. A trend trader first looks at the trend’s direction: bullish or bearish. In this case, a bearish trend.

As such, the aim is to sell overbought levels with the oscillator, while the trend lines still hold. Oscillators represent the best Forex trend indicators in this case.

Traders will either sell when the price comes to the trend lines (in this case, three opportunities) or, even better, will wait for the RSI or the oscillator to give a sell signal too.

This is how a Forex trend scanner system works. Waiting for confirmation will always pay, in the sense that there is little or no drawdown after such a trade.

This Forex trendline strategy gives five trades to enter the trade. These five new trades have little or no drawdown.

However, the money management strategy will keep things nice and simple: place a stop loss at the previous swing’s high and go for 1:2 or 1:3.

Live Trading Example Showing How to Trade Forex Trend

Below you will find a FREE video example that shows a short trade taken as a result of a bearish trend bounce. Although the price implied a tricky breakout first, I identified the break as a fake and I held the trade for the upcoming bearish impulse.

Simply enter your details and see the Forex trend trade for free:

Different Forex Trend Trading Strategies

The biggest advantage of a trend is that you cannot miss it. That is, if you pay attention to details.

As mentioned earlier, look for a series of lower highs in a bearish trend. Or, higher lows in a bullish one.

Then simply draw a trend line connecting the lowest points (in a bullish trend) or the highest ones (in a bearish trend). The resulting line is the best Forex trend line indicator.

A trend trader doesn’t need a trend indicator “per se”. A trend trader needs clues that give him/her a competitive advantage in front of other market participants. The higher lows/lower highs series represent such clues.

Support and Resistance with a Forex Trendline Strategy

Everyone knows about support and resistance. But, few traders know that the most powerful support and resistance levels do not form horizontally.

They’re called dynamic support and resistance levels. When riding a Forex trend, they work like magic.

Riding a Forex trend is one thing. But picking up a top or a bottom after a Forex trend is another!

Yet, this is a risky approach and doesn’t represent a sound Forex trend trading system. The EURJPY chart above illustrates that.

The bearish trend worked for quite some time. After the two points gave the Forex trendline strategy, a trend trader had great opportunities to ride the trend.

However, with a proper strategy, one can pick a top or a bottom. Again, patience is key!

AFTER the price breaks the trend line, a trend trader looks at resistance turning in support. In other words, buying starts.

The RSI acts as a bellwether here. Again, the strongest signal is the one that has both the RSI and the trend line acting together like a Forex trend strength indicator.

In this case, a Forex trend trader may buy the first RSI signal after the price broke higher. If that’s the case, the stop loss should be at the previous swing’s lows.

While that trade didn’t work in a straight line, the second one did. When the RSI and the trend lines act together like a Forex trend line indicator, traders enjoy the ride.

Ichimoku as a Forex Trend Indicator

To illustrate the simplicity of a trend-following system, I’ll use the Ichimoku indicator. This one is famous for showing a balanced market: it forecasts future support and resistance levels while uses historical prices.

When riding a trend, Forex traders look at places to add to the original position. The Ichimoku helps in this regard.

Above there’s the USDCHF four-hour time frame. The Ichimoku cloud acts like the perfect Forex trend indicator.

When the cloud turns red, traders look to sell. When it turns green, it is time to buy. Isn’t trading easy?

The best trading indicator is the one that shows future price levels. Ideally, it will show both the future price and the time when the market will go there.

Using this simple Forex trend approach, simply sell when price meets the red cloud while not breaking the previous swing’s highs. Again, the money management system matters the most.

When/if the stop loss gets hit, the Forex trend reverses. But, if a trend trader uses a proper risk-reward ratio when the stop loss gets hit, the market opens a new opportunity. A new trend starts, and the same logical process begins.

Conclusion

There’s no best trend indicator nor a Forex trend detector system that works all the time. Because the Forex market spends most of the time in ranges, a trend trader sees many fake moves.

But discipline overcomes setups. There’s no setup that work’s all the time. However, a Forex trend strategy works all the time.

The important thing is to make sure your account survives the next day. And the next one. And so on.

Retail traders face many headwinds. Trading algorithms (robots) govern the markets today. Yet, profits can be made riding trends.

Because the Forex market ranges most of the times, a trend trader goes on the lower time frames to catch the intraday moves. But this is a risky, as the market will swing from lows/highs simply because the previous lows/highs were broken

To make sure they survive in the long run, Forex trend traders look at the bigger time frames. The bigger picture always tells the truth.

Monthly, weekly and daily charts matter the most. They filter the noise in any given trading day and keep traders on the right side of the market.

All in all, every retail trader wants to ride a trend. Few make it, though. This article explains why they fail and what to do to succeed.

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Why the Trend Is Your Friend When Trading

Watch our video on why the trend is your friend when trading and read below why trend trading is better than calling tops and bottoms.

The Trend Is Your Friend

  1. Why is the trend your friend? The more you learn to trade, the more you realize how helpful the trends are. It provides to many necessary details. For example, direction as well as support and resistance. Also where the momentum of the stock is. Going against the momentum could cause you to lose more trades. Trading with the trend, could help you win more trades.

The trend is your friend. That’s a statement you’ve probably heard a million times if you’re a trader. When you begin your stock market training, the importance of the trend should be noted. Are you trying to call tops and bottoms and having trouble? How’s that working out for you? Maybe its time you go with the flow and trade with the trend. read on and understand why Is say this.

You need to be able to spot the trend as well as know how to draw trend lines. You can open a practice account in Thinkorswim with TD Ameritrade to practice the correct why to draw trend lines. Yes you’ll need practice at first. Trading isn’t easy, but spotting the trend IS.

1. Why: The Trend Is Your Friend

The trend is your friend. Why? Have you ever tried to trade with no clear trend in place? It isn’t fun or necessarily easy. However, there are strategies in options trading such as the iron condor that are neutral strategies.

Although, most strategies require a trend in order to be successful. However, day trading can be done without a strong trend in place. Although, those stocks can struggle as a result of no strong trend.

Swing trading without a trend in place is pretty difficult. Hence why the trend is your friend. Since swing trading means holding a stock at least overnight up to a couple of weeks, you need a strong direction.

The back and forth of a trendless market or stock will take your profits in a heartbeat. The trend is your friend because it goes a long way in protecting your trades.

Many times traders will end up swing trading to get around the PDT rule. This rule limits the number of day trades you can make if you have an account under $25,000. Hence the helpfulness of swing trading.

You can hold overnight (or longer) and not have it count against your day trade limit. As a result, you can use your 4 day trades elsewhere.

Take our online trading courses to learn the different trading styles to use in trend trading.

2. Support and Resistance

The trend is your friend can provide pretty important support and resistance levels. One of the most important thing you can learn as a new trader is support and resistance.

Many times, new traders haven’t taken the time to learn support and resistance before they begin trading. As a result, many times they buy at resistance of trades that were running only to have it fall and end up with a loss.

Support and resistance can be found using the real bodies and wicks of candlesticks, moving average lines as well as trend lines. That’s where support and resistance comes into play with the trend is your friend method.

Not only are there the straight lines that make up those crucial levels but angular lines as well. If the stock is testing the angular support of an uptrend, that’s critical to how you’d go about a trade.

If it holds, you can get a good entry. However, if you buy without confirming the angular support holding, you can end up taking a loss. Support and resistance levels are so important ever trader no matter how seasoned, pays attention to them.

If the seasoned traders believe the trend is your friend, then all new traders should realize the importance of this as well.

3. Direction Matters

Have you tried trading without a strong trend or direction in place? It’s not easy. In fact, trading anything without a trend tends to be sloppy.

If you’re apart of the Bullish Bears community and take advantage of the live streams each morning, you’re well aware of how hard it is to trade without a trend in place.

The trend is your friend because direction matters. Whether it’s a strong uptrend or strong downtrend, you know how to trade them. However, when a stock or the market can’t seem to choose a direction, it’s nearly impossible to swing trade and day trading is much more difficult.

When the market or your stocks you’re looking at follow a trend, you can ride that up or down. That doesn’t mean there won’t be days that a stock or the market pulls back. It just means those losses typically are small and over quick. Stock market trading needs direction to get the best profit.

Only options trading has strategies with can make money in neutral markets. As a result, if you don’t trade options, then the trend is your friend. Many times the trend is still your friend even trading options.

Final Thoughts on the Trend Is Your Friend

The trend is your friend is because direction matters in the market. If you take a look at the past year, any time the market couldn’t choose a direction, trading was difficult. Make sure you can draw out your trend lines correctly as this will be a great help to you when finding the trend.

The trend is your friend

You may have come across the saying „The trend is your friend“ but actually identifying a trend and trading it are two completely different stories.

This article’s main focus will be on how to identify a trend and what tools there are to stay in a position for long/mid-term swing trades.

First off, there are three different stages how the market can move:

Your first task when viewing a new asset/token/coin is figuring out where price is in relation to what happened to the left and what it is doing now.

In order to obtain a view of what is going on you have to zoom out. An intraday or scalping timeframe (M30 and lower) won’t suffice to see the full picture and thus using higher timeframes is mandatory. What I mean by that, you have to use at least the daily TF or higher.

What is a trend:

A trend is a long term move in one direction that can sustain over days, weeks and even months or years. Each trend consists of multiple short-term trends within. You can also view the different trends as a type of cycle which can take place on any timeframe.

How do we identify a trend:

As mentioned before there are three different types but our main focus will be on the uptrend and on the downtrend.

In very simplistic terms:

An uptrend consists of higher highs and higher lows

A downtrend consists of lower highs and lower lows

These key elements can be found on any given timeframe where the shifting of the trends are fairly visible. Often you can use trendlines in order to determine the direction of trend but it all comes down to the very basics of higher highs and higher lows for example in an uptrend.

How to determine the strength of the trend

Generally speaking as price is trending higher and higher more buyers step in and not only that also shorts are forced to close their position by buying. This is to a certain amount visible by increasingly bigger bullish candles. The bigger the candles the stronger the move and the less likely it will be that the market will allow you to enter at the level prior to the breakout.

How to enter trades in the direction of the trend:

Once price is moving fast you often see people talking about buying the dip. In a very strong uptrend as previously mentioned the pullbacks are relatively small and thus entering can be sometimes difficult to time.

In an uptrend you want to buy and in a downtrend you want to sell the rallies — a different topic for another time though.

Hiccups in between

Of course as you can imagine price never goes up or down just in straight lines. It sometimes just consolidates a little and continues its journey higher or lower or goes sideways for a longer period of time. Depending on where price is in relation to the overall market structure (What is Market structure) and to what happened on the left it can either be a phase of consolidation before continuation or an actual trend reversal.

Trend reversals are a completely different topic though but let me just get into that quickly.

Catching the bottom or the top of the trend is a difficult task and most of the time no achievable. The same goes for calling bottoms and tops — until the market hasn’t actually proved your theory right which sometimes can take longer than expected anticipating bottoms or tops shouldn’t be your number one priority but rather expect continuation of the current trend. Now there are plenty of exceptions where different approaches in certain situations come into play but this would extend this article’s main purpose by far.

From a trading perspective anticipating the top of a bull trend can also often lead to a strong bias and the stronger you are convinced price must do what you think it very likely won’t do that.

Trade the direction of the trend and not what you think where price should be going. Be fluid as water as once Bruce Lee said.

Shorting a very strong uptrend for example is like swimming upstream. It requires more discipline, experience and risk management. Often trading against the trend involves more risk and isn’t smooth. (See example above: A lot of people were expecting BTC’s latest rally to stop at 6.k and preemptively jumped into a short position)

You identified the direction of the ongoing trend and now you may ask how do I stay in a trade:

There are many many different ways determining how strong a trend is and if the trend is still going into the direction you have evaluated.

Exhibit 1: MA 200

Downtrend — Price stays below the 200 MA on the daily timeframe

Exhibit 2: The GUPPY or GMMA

I bet you can google yourself how the guppy works but in short:

It consists of 5 slow and 5 fast EMAs. If the EMAs are compressed bulls and bears are in agreement, but when the fast EMAs go above the slow EMAs the trend turns bullish and vice versa bearish.

To make things even more simpler, as long as price is above the guppy and if the guppy is green the trend is still active or in a bearish case red. Now it’s a fallacy thinking that you only have to buy green and sell red. The guppy is just a mere colourful tool for depicting how the mid or long term trend is. Given it’s nature and being calculated by EMAs it gives you very late signals and thus potential lost profit if you solely rely on the guppy.

Exhibit 3: EMA 9 & 18

Exhibit 4: MA 50/200

The issue with trading moving averages is, that every time price dips into a demand zone, the moving averages are sloping down and by the time they point upwards again you missed your optimal entry and end up buying high instead of buying low.

Usually if an impulsive move occurs it’s wise to go along with the crowd and trade the direction the market has given you. In strong trends taking counter trend trades can be risky. It’s far more easier to sell rallies in a bearmarket than anticipating where the bottom is going to be. The same applies to bull markets — buying support and or dips will be way more profitable than falling victim to the guesswork of figuring out where the top is going to be.

The trend is your friend — until it isn’t.

Let’s say the market is trending higher and there were 10 buying opportunities and you bought each of them and sold local highs but the 11th one was actually the top and when you thought it’s going to stop at support and went long but price didn’t stop there but instead went lower, you’d still have a pretty good strikerate and not only that you’d sit in pretty nice profits.

If the trend is changing you can once again shift from buying the dip mode to selling rallies again.
You now may think, but Sir I could make double the money if I go long at the bottom and short the top — theoretically yes, practically NO!

As mentioned earlier swimming upstream can be an exhaustive and difficult task to accomplish and not only that if you go with the trend you are going to have safer entries and better risk/reward because moves in the direction of the trend tend to be longer and thus offering more potential profit than trades against the trend.

It’s important not to lose sight of the overall bigger picture. It’s tempting to get lost on intraday timeframes and observe price action how it behaves and where it wants to go but ultimately the higher timeframe will win the game.

Buy dips in an uptrend and sell rallies in a downtrend.

The rules are the same regardless of the timeframe. You don’t have to catch the bottom or top in order to make money but you have to be consistent with what you are doing and in balance with the market. Trading your personal bias of what price might do here and there can often lead to a false analysis and thus forcing you giving money back to the market.

Thank you for your time and reading this article.
Retweet and share if you enjoyed it — it’s very much appreciated.
Feel free to follow me on Twitter — [Click me]

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