Trend Trading – A Simple Guide
The idea of trend trading is simple to comprehend and very common among forex traders. A good trend can be noticed by anyone on a chart (in the lack of an obvious trend, prices are by classification ranging). Many forex strategies are according to trend trading, but effective application of it demands solid discipline.
What Is A Trend
In the financial world, a trend is a obviously noticeable direction in the price development of a financial item. (be it currency pairs, or futures, stocks, bonds, options or other financial tools). For example, take a look at the next chart, which signifies the price development of oil. The chart obviously displays trending in the oil price. First, oil is pushed to a price over $140 a barrel in a obvious trend. But then, an sudden trend reversal occurs and the price falls dramatically, to a level below $50 a barrel.
During an uptrend, prices go on to make higher highs, while in a downtrend they go on to create lower lows. Clearly there are momentary setbacks, called retracement, but the typical direction is apparent. A good trader once said he used to print out a chart, don it the wall of his study and then relax and examine it from a few meters away. If he could identify a clear trend on the chart he would enter on the trade, if not, then no go.
Basic, yes, but nonetheless efficient (though on the downside, he has since had to begin putting on glasses) According to most technical analysts, currency pairs switch within a relatively modest bandwidth 70 to 80 percent of the time. That is one of the explanations why numerous traders use Bollinger Bands for their technical evaluation, because it's a very beneficial indicator for forecasting patterns within a particular bandwidth. So in fact, prices are moving sidewards ranging a lot more frequently than they are trending. That makes successful trend trading challenging, but also potentially very rewarding.
Trend Trading Strategy
The objective for a trend trader is straightforward: try to enter when the trend has just began and then stay with it till the price action turns again in a trend reversal. The basic presumption for the trend trader is that the price will keep moving in the course it was moving when he put the trade on. If true, a trend would certainly exist and the trade would be a victory. If not, a trend unsurprisingly does not yet exist, and the trader ought not to be in the trade.
This sounds easy of course (and it essentially is) but it also means that by classification, a trend trader gets into many positions that die rapidly, stopping him out for small cutbacks. Yes, you could put your stops even further away and get stopped out less often, but this risks eating away at your Expected Value per trade. Often, the results of a good trend trading strategy is about taking on many small losses in return for one big winner. The thriving trend trader is aware this and has the discipline to withstand it.
A trend trader who risks 30 pips per position to gain 1500 and lastly gets in on a profitable trade right after 15 unsuccessful tries, loses 15 x 30 pips and wins 1500 pips with that one, amazing trade. So he'll relinquish 450 pips but wins 1500. If we subtract an average of 3 pips spread per trade, the trader would still get a total profit of 1002 pips over 16 trades, or 63 pips per trade. Not lousy at all!
Sounds good, no? Still, this type of trend trading is not for everyone. It can be quite annoying to have to put on 15 losing trades without seeing for sure that that 16th trade is really the fat, profitable one. The enticement to think the ‘this trend will start any moment' whispers of your sentimental self grows, trying to convince you to place those stops further and further away. Worse yet, you might be enticed to leave them out entirely (after all, you're right and ‘they' are wrong). Surrender to this, and the fairy tale will not stop with the boy/girl that made a million dollars trading, but with a exhausted forex account.
As a result, every forex trader looking to focus himself as a trend trader, would excel to begin by looking himself squarely in the eye (if at all possible in front of a mirror) and ask if he could take on 10 losses for each winner.
And don't neglect you will also have to avoid the enticement of cashing out too fast on that winning trade, agreeing to 300 pips in profit when it may have been 1500.
But not to be concerned if trend trading is not your thing; there are a lot of other trading tactics for you to become highly thriving in.