If not, well: the trend is your friend! STRATEGY: HOW TO TRADE THE FX TREND – There are a myriad of ways to trade the Forex market and as traders it’s our prerogative to continuously assess how price is behaving in an attempt to exploit recurring patterns.
In this article I want to divulge one way you can identify a trend and more importantly trade it for your own.
Tools to identify trends
I am merely highlighting one way and that’s with the use of exponential moving averages (EMA).
Moving averages are useful to a trader as it can explain additional information about the general behaviour of historical price action. To do this you go to ‘insert’, ‘indicators’, ‘trend’.
It’s quite common for traders to use moving averages but in this case we’re wanting to use a relatively large ensemble of them. We want to see several ‘fast’ and ‘slow’ moving averages to mitigate the odds of a false signal in trend.
This graph above is on the daily timeframe on XAUUSD (GOLD). Let’s look at the exact EMA’s used:
- Small net (light orange)
- 3,5,8,10,12,15 (EMA)
- Large net (light blue)
- 30,35,40,45,50,60 (EMA)
- Trigger (dotted black)
- 21 EMA
How do we know when we’re trending?
Even though we’re discretionarily trading the trend, we need hard and fast rules to live by.
Below is a chart on the H1 timeframe on XAUUSD (GOLD). This means that from top to bottom, the EMA’s were in this order descending order and not overlapped.
This point highlighted in blue on the graph above would be referred to as our ‘alert candle’. We’re not quite ready to jump into a trade just yet, but we’re now interested and keeping a close eye for our ‘trigger candle‘.
When to jump into the trend
Continuing from the chart above, at the time this happened we’d now have our eyes peeled for the ‘trigger candle’.
The trigger candle event is when we get a ‘pull-back’ into the 21 ema (dotted black line) like so:
There’s a few rules when evaluating the close of a candlestick before we can say for sure that it’s a valid trigger candle:
The bar cannot close above the 60 EMA (highest blue moving average)
A trigger candle cannot also be the alert candle.
It cannot touch the 21 ema (black dotted line) and then close beneath the recent swing low.
The reason for point 3 is because of the following:
How to ride the trend
So, we need to manage what the market gives us.
It’s important to note that typically, trend following strategies have a low win rate but when the winners come around, they’re nice and juicy in comparison to the losers.
It’s crucial that we give our trades enough breathing room to avoid getting stopped out prematurely.
Additional tips to trading the trend
However, it shouldn’t go without saying that this is a textbook example.
When trading the trend it’s important to remain conscious of the following:
Let higher time frames dictate what you’re doing on lower timeframes
Finding confluence on multiple time frames
Give your trades enough breathing room on the trailing stops
Factor in significant support and resistance levels upon entries, stops and take profits.
Most importantly, make sure you test the strategy first in programs like Forex Tester 3.