We all have heard the cliché: “The trend is your friend”. As a matter of fact it must be one of the best known trading phrases. Identifying emerging trends in the early stages is considered one of the best ways to profit from forex trading or trading other markets.
Beginning traders frequently are advised to stick with the trend since trading in the direction of the trend is “easier” than trading counter trend. While catching the trend may sound simple in reality it is not always that easy. Just like trading in general, trading with the trend is “simple, but not easy”!
One Problem with Trends:
Trends are easy to identify after the fact but not so easy while they are forming. It’s difficult to know at the time if price moving up and down will turn out to be a solid trend or just a consolidation pattern. You just won’t know conclusively until after the fact!
That’s why traders use different indicators and parameters on their charts to help them identify a trending market. For example traders might use upward or downward sloping trend lines and moving averages or look for the stochastic oscillator displaying gap and angle to help identify a trend.
Other traders might use price alone, perhaps they are looking for price to form higher highs and higher lows or lower highs and lower lows to help them identify a trend. Whatever indicator or patterns are used to identify a trend, it’s just one part of the equation.
The other part of the “trend equation” is your time frame. What time frame are you trading? If you day trade, moving in and out of trades on the 15 minute chart, the monthly trend is of minimal significance to you.
This is not to say that you won’t look at the monthly chart, perhaps observing levels of support and resistance that might impact your trade. However, the trend on the daily, 4hour and 1hour chart will be of great importance to you and therefore you want to know the price trend on these time frames.
While trading with the trend, or trading with momentum, is a good strategy regardless where you are in your trading, it may not always be the best thing to do.
For example, there are times in the markets, where trading with the trend may not offer any or only few trade setups. Also, you may trade certain times of the day when counter trend strategies offer fairly reliable setups and momentum trades generally have been exhausted for the trading session.
Looking back, it’s always easy to see when the trend began. Unfortunately, most of us don’t have a crystal ball to tell us what will happen next in the market (or anywhere else for that matter!).
It’s easy to read into price what we want to see. But two higher highs or lower lows don’t necessarily make a trend. To identify trends we must look to the higher time frames, even if we trade short term. Additionally we must be aware of market dynamics when we trade.
Forex Trend Scanners
This is where trend trading software can help you, by taking out the human element and producing signals only when all of the right conditions are in place. Trading on the right side of the market, aka with the trend or being aware of the trend, will proof to be most beneficial to your successful trading.