Many beginner forex trend traders assume that the key to their success lies in correctly identifying a currency pair’s prevailing trend and making trades based on these trends. While this is true, there are other factors that determine your effectiveness as a trend trader. In this article, we will explore some of these factors and give you a better idea of how to effectively take care advantage of trends.
1. Understand Key Resistance And Support Levels
As a forex trend trader, you should keep track of crucial support and resistance levels as they tend to have a big impact on existing forex trends. For example, a strong uptrend might break through short-term resistance level and keep going, but is likely to reverse when it encounters a medium-term, or long-term resistance level. The same is also true for an established downtrend that runs into a long-term support level and reverses due to the strong impact of the support level.
Always remember that the natural course of action for most forex trends when they hit a crucial support, or resistance level is to reverse, even if for just a short period, before deciding to break through the level, or to entirely reverse course.
Effective forex trend traders constantly monitor for developing chart patterns in order to identify when trends might be about to reverse, or to break out of existing patterns. Monitoring developing chart patterns usually helps traders to predict the most probable future direction of a particular currency pair. Some of the developing chart patterns that you should monitor closely include falling and rising wedges, normal and inverted head and shoulders patterns, and double and triple tops and bottoms. These patterns usually lead to significant moves by a particular currency pair as explained in other articles.
Forex trends usually play out in three main types of trend lines, which are the steep trend line, the medium trend line, and the shallow trend line. As a trend trader, you should always monitor for breaks in the existing trend line as they may indicate that the current trend is about to reverse. However, each of the above trend lines behaves differently once it is broken. For example, when the steep trend line breaks, this might not indicate a trend reversal because the trend could then settle on the medium trend line. The same is also true for the medium trend which once broken can easily settle on the shallow trend line. However, once the shallow trend line is broken, there is a huge chance that the trend is now about to reverse.
One of the most commonly used trend indicators is the Moving Average Convergence Divergence indicator, which is commonly known as the MACD. Whenever a currency pair is making higher highs and the MACD is moving in the opposite direction, this is referred to as divergence. The divergence between the MACD indicator and the prevailing trend is usually a sign that the trend might be about to reverse. As a trend trader, you should generally take this divergence as a sign to close your trade and collect any profits.
The opposite of divergence is convergence, which usually acts as confirmation of a given trend. Convergence usually occurs whenever a currency pair is making either higher highs or lower lows and the MACD is moving in the same direction. This usually confirms that the current trend is quite established and is likely to continue for a while.
As a forex trader, you should keep a record of all your trades, along with notes on the reasons you took the trades. By keeping a record of all your trades, you can easily review them to identify any mistakes that you might have made and avoid making them in future. You can write about your trades in a physical journal, or you can keep an online journal where you use screenshots to document all your trades. You could go a step further and keep a video log of all your trades.
The above tips should serve you well as a forex trend trader. However, you should always keep in mind that there is no perfect trading system, and that even after following all the above tips, you will still have some losing trades. You should combine these strategies with the appropriate risk management strategies in order to limit your losses whenever you have a losing trade.