October 21, 2013

A Guide to Trend Trading Forex Strategies

This article looks at trend trading forex strategies and the considerations one must make when using them.

Trend Forex Strategies

Regardless of the financial market you are trading, you must be prepared for a highly volatile environment.  Due to the constant fluctuation of the foreign exchange market, one must be prepared both technically and psychologically.  This will require the development and mastery of different technical trading strategies, as well as different psychological coping strategies.  It is important to understand the different market conditions and how to trade each effectively.

Range trading forex strategies

Contrary to popular belief, the foreign exchange market does not always experience high volume activity.  These quiet periods are known as range markets and are the general state of the forex market.  Range traders are generally more placid than trend traders and are not concerned about the direction of market movements.  They feel that irrespective of a currency fluctuation, the currency will always return to its original baseline.  The most effective range strategies are long-term strategies where prices are watched over prolonged timeframes.  This may be tedious but it is beneficially in the long run.

Trend trading forex strategies

While a range market condition comprises approximately 80% of trading time, the other 20% is made up of trend movements.  This is when the currency price of a currency pair will move steadily in one direction.  An individual can identify this trend using different types of analysis and trading tools.  The timeline of a trend can vary from hours to days dependent on the strength.

A trader using a trending strategy will execute and hold trades on the given trend.  Generally one can experience profits using this strategy, but only if the position is entered early and held until the trend turns or reverses.  This is an incredibly risky strategy and in order to use it effectively one must implement appropriate risk management techniques, such as stop losses.  This will ensure you do not lose as much capital as you might have had the stops not been placed.

While exciting, especially for the impulsive trader, the trend trading strategy must be used with caution.  When choosing this option you must consider a reward/risk ratio and determine whether the means are worth the outcomes.  If you decide to utilise this forex strategy, it is imperative you find the correct entry point as an incorrect one can lead to detrimental losses.  All these factors, particularly the risk management, must be remembered when creating a trading plan.

Leverage and liquidity in trend trading strategies

The majority of new traders will employ leverage in order to make large profits.  Trend traders have been noted to use leverage in the same manner.  However, this can be extremely damaging to the high risk trend trading strategy for if the trend reverses suddenly the losses can be exorbitant.  This must be kept in mind when choosing the option of leverage.

As can be seen, trend trading can be highly profitable but also extremely disadvantageous.  Due to the risk of loss, stops are essential as a means of risk control.  Furthermore, the trend trader must examine the liquidity in a market to determine whether trading will be beneficial in the present condition.  This is something many new traders forget to do leading to inappropriate trading.



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