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Many traders consider trends one of the most popular and reliable price patterns used in technical analysis to forecast future exchange rate behavior. Those speculators who seek such patterns out to trade according to a specific plan could be called trend traders.
Forex traders often implement this particular trading strategy in medium- to long-term time frames, and it can be encapsulated by the well-known market aphorism, “The trend is your friend.”
Identifying a Trend
In general, trending markets consist of time periods when the exchange rate moves substantially in one direction or the other. If the directional movement is upwards, the market is said to be in an upwards or up trend. Conversely, when the directional move is downwards, the market is said to be in a downward or down trend.
A trend can be readily identified by reviewing exchange rate charts to look for a series of higher highs and higher lows in the exchange rate to indicate an up trend. Alternatively, a series of lower highs and lower lows signals a down trend.
Lines known as trend lines can be drawn through these highs and lows to indicate where future support or resistance might lie. When those top and bottom trend lines run parallel, they form a chart pattern called a channel.
Trading Trends
Trend traders often employ a trading method where they initially identify a trend forming in a currency pair once a significant reversal has been seen in its exchange rate. Once identified, the trend generally needs to be confirmed before taking a position by using a technical indicator like a set of short- and longer-term moving averages.
Upon confirmation, trend traders then look for opportunities to enter trades in the direction of that trend on market pull-backs or corrections. Eventually, a position is established in the direction of the trend and orders will then be placed to liquidate the position, usually at pre-determined take-profit and stop-loss levels.
Furthermore, after taking a trade with the trend, a trader will then seek to ride the trend as far as possible with the position often trailing their stops a certain degree behind the price action to protect existing profits. Eventually, the trend trader will want to close out the position just as the directional move finalizes.
Nevertheless, in practice, they often end up liquidating positions once the trend has ended or taken a breather. In order to identify such pauses or reversals in a trend promptly to protect their gains, a trend trader will often follow exchange rate movements closely, in addition to using different technical indicators, like moving averages and the Directional Movement Indicator or DMI, to alert them to a pending trend reversal.
Trend traders might also look to take advantage of exchange rate swings within a trend. For example, when trading an upwards move they might look to establish long positions ahead of the rising trend line below the price action and to close these longs ahead of the rising trend line above the price action. The opposite would be the case if trading a down trend.
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