Forex Trading Education: Identifying Trends
An essential part of any trader’s forex trading education is learning to identify trends. This is your signal that the market is making a sustained move, either up or down, and you can profit from it by opening a trade. The famous saying ‘the trend is your friend’ is at the heart of this strategy.
Using trends to profit from forex trading may seem almost too simple. Yes, it is a simple strategy, but it works … provided you can tell the difference between an emerging trend and a mere fluctuation. That is where the skill, experience and tools come in. But really it is a very simple strategy and you should not try to complicate it.
There are several different ways of identifying a trend using either technical analysis (charts and indicators) or market knowledge (fundamental analysis). Drawing trend lines on a candlestick chart is probably the simplest method. You can identify triangle patterns that will predict a breakout in one direction or the other, and check these against other indicators such as the MACD crossover. It is also wise to check your pattern on charts for different periods, e.g. check hourly against daily charts etc.
There is no need to know all of the different methods for spotting a trend. Perfect one or two reliable methods and you have all you need to make money. Remember that all methods have their successes and their failures, and it is the overall profit or loss over the long term that counts. Do not be put off by one failure, and control your risk so that a couple of losses in a row will not have a big effect on your funds or on your confidence.
Experience can make all the difference and you would be well advised to practice on a demo account before trying out your method on the real market. Traders with many years of experience can often recognize patterns without even knowing that they are doing it. They do not consciously remember having seen a situation before, but long experience of watching and trading the markets gives them a deep knowledge that will often help them identify signals very fast. It is worth beginning to develop that experience before you leap in with real money.
In the beginning you will not be able to ride the whole of a trend from its starting point to its peak or trough. In fact, hardly any trader ever does this. You must wait to be sure that a trend is forming. Equally, do not try to hold out until the last moment to try to grab every last pip. Set your profit target and be happy with it. In the long term this will pay you better than trying to second guess the market.
Finally, do not follow any type of forex trading system that relies on changing your position size depending on whether your last trade was successful or unsuccessful. This is a recipe for disaster, as thousands of ruined gamblers have discovered. If you have a good system your profits will exceed your losses without resorting to gambling. Investing time in your forex trading education is the key to making money from the forex markets.