Trend trading is one of the easiest and most popular trading strategies in the markets as it provides a straightforward method of speculating in the forex markets. However, as all strategies, it requires patience and confidence something mega successful investor, George Soros, is a master at.
The long road from entering the forex markets to reaching a level where a trader makes consistent profits is not an easy one and demands discipline. Successful traders will always say that their effective and profitable careers as investors are partly due to their determination to stick with specific trading strategies. These strategies vary in terms of experience level and risk appetite of the trader, but the one thing all of them have in common is their ability to keep the investor within a set of rules to follow. Trend trading is one of the most popular medium or long term strategies within the forex markets, it’s methodology is easy, and many were able to become successful traders by following it – including Soros.
Just like surfers, trend traders are on the look for the next price wave i.e. the next trend. Then, after they are confident that the trend is there to stay for a while, they place their positions with the view that the trend will continue and then close them once they see that the trend is about to reverse. In order to catch the next wave, trend traders may choose to employ either technical or fundamental analysis, or both. On one hand, fundamental analysis may be applied to predict the intensity and duration of a market’s trend through following up with economic news and data on markets as they are released. On the other hand, technical analysis is more appropriate for giving information on the beginning of a trend and hence, to suggest when to enter a position and how to trade. Even though fundamental analysis is preferred to technical analysis for deciding on a trend which is there to stay for a while, using the combination of the two may be the best option since fundamental methods are likely to save a trader from false signals from technical analysis and the application of technical tools will provide details such as entry points and price frames.
Finding the point of entry into the markets is of equal importance as figuring out the time length for which to keep the position open. Many successful trend traders say that there is evidence to keep holding on to a position as long as the trend is backed by prevailing fundamental reasons. Even if a trend trader is able to make useful assumptions out of fundamental analysis, the use of technical tools is still likely to equip him with an early warning system. It is not uncommon to see price action seriously deviating from the trend and suggest that there might be some form of error with the fundamental outlook. In that occasion, technical analysis would come in handy as a tool to re-examine the position and either provide additional evidence to keep the trading position or to end it.
The toolbox for forex technical analysis is huge but the most common tools used for trend trading are moving averages and good old price charts. The combination of the two can give signals of trend reversals, and traders have the option to choose from moving averages calculated for 10 periods (MA ) up to moving averages calculated for 200 periods (MA ). Many trend traders also choose to follow crossovers of moving averages for their technical analysis.
Trend trading strategies will suit individuals who are interested in either long or short term strategies, and are able to blend fundamental and technical analysis. Perhaps the most attractive factor behind this strategy is the ease of its application and its ability to be moulded in order to suit investors with either a lot or little time to trade.
By David Parker