HOW TO USE THE TREND IN FOREX TRADING

If you’ve been learning to trade forex or any other market for that matter, you’d have heard the phrase ‘the trend is your friend’. As useful as this is to know, this in itself doesn’t help you actually act in the market. In fact, although it’s considered safer to trade with the trend, many traders also take counter-trend trades and pullback opportunities in the market.  Trading Firms

In this article, we will be looking at how to identify a trend and how you can use the trend to frame trading ideas for both trend following and counter trend trades. Let’s get into it!

Using The Trend In Forex Trading

There are typically 2 market cycles within any market, including forex. These are ‘trend’ and ‘consolidation’.

In a consolidating market, the price of the currency is moving sideways, with very little price action of market structure. This market is typically very hard for manual traders to make consistent profits in. However, for traders with algorithms, high-frequency systems and grid systems, this market type will yield strong results.

For trending markets, the price typically moves in swings in one direction for a long period of time. These trends can take place in all time frames, from the 1 minute to the monthly. These conditions are usually the most profitable conditions for manual traders, as price action tends to be respected and trades can run for longer into deeper profits.

Typically, most of our Funded traders have the most success in trending markets.

Now we have established the various types of market trends and cycles, let’s look at how to identify which cycle the market is currently in, so you can gear your trades accordingly and build your trading strategy.

Identifying A Trend In The Markets

One of the most important parts of forex trading consistently is to fully understand the market conditions and environment you’re trading in.

Let’s take a look at a trending market:

This is an example of a bullish market trend.

It’s worth noting that not all trends will be perfect, as the market is not perfect from a technical analysis perspective. However, a bullish trend will primarily consist of higher highs and higher lows. These higher highs and higher lows will, of course, be moving the market to the upside and give plenty of opportunities for traders to enter the continuation of this trend. Traders all have different opinions on when a bullish trend begins, but we like to look for 3 things.

A break of the previous lower high from the bearish trend.

A higher low being created.

A higher high being created.

This is usually a great indication that a bullish trend is starting to form. However, you cannot be sure at this point, so exercise a massive level of risk management if you intend to enter trades at this point. For bearish trends, reverse everything written above.

Let’s take a look at a consolidating market:

Consolidation is simple to spot, in fact, much easier to spot than trending markets, and they’re much more common.

In a consolidating market, there are not any noticeable higher highs, higher lows, lower highs or lower lows. The market is essentially just moving sideways. You’ll often see ‘fake breakouts’ of these areas where price will move slightly out of the consolidation range before moving straight back inside, trapping all traders that traded the initial breakout.

Many of our Elite Trading Club traders like to avoid these markets.

Again, this is a very simplified example, but for the majority of situations, this is what a ranging market looks like!

Trading Against The Trend – Pullback Opportunities

So, do you always need to trade with the overall trend? Well, no, not really. In fact, many successful traders like to trade counter trend set-ups as the market cannot run in one direction forever without pulling back. It’s worth noting that these counter trend moves are usually seen as being more risky than trend following strategies, as you don’t want to ‘catch a falling knife’.

Let’s look at an example of a pullback strategy:

This is a counter trend trade on EURUSD 4H Timeframe. Looking at the annotations on the chart:

A – We have a clear bullish trend with higher highs and high lows being created. This can be seen more clearly on the lower time frame, such as the 1H.

B – Price reached a supply zone on the 1D timeframe.

C – Price broke a strong trend line to the downside, indicating an entry for a pullback for traders looking for a pullback in price.

D – Price then pulled back to the target of the 50 EMA. Click here to read our full EMA trading guide.

This is a fairly simple trade and is very much worth back testing and adding strict rules to, if you’re interested in playing both sides of a trending market.

It’s worth noting that the market is still bullish in this case, meaning you would be looking for a small trade in terms of pips, rather than looking to hold this all the way down to the 4H lows.

Trading With The Trend

Now, let’s look at everyone’s favorite – trend trading! This is widely thought of as being the safest and smartest way to trade forex.

1. Swing Trading

Trend trading works great with swing traders as traders that swing positions typically want to hold positions for as long as possible and be fairly hands-off in the markets.

Let’s take this EURUSD example below:

Indicated on the chart is the shift in trend between bearish and bullish as the market starts moving to the upside.  Once swing traders see this and the trend is confirmed with yet another break of a high on the H4, an entry is possible on the pullback to the 50 EMA. Many traders will use various difference confluences for this entry point, including Fibonacci, candlestick patterns and trend lines.

2. Day Trading

Day Traders also do very well off trending markets! Let’s look at the same EURUSD example.

Using the H4 to analyze market trends, as shown in the swing trader setup, you’d be looking for short-term buy opportunities on the lower time frames as a day trader.

Looking at the confluences, we have:

Support level on the M30 and H1

Market moving to the upside

Clear high for target

Price breaks and retests a minor support level at London session open

 This gives day traders a perfect entry into the trade and allows them to capitalize on the larger trend without needing to stay in the market for the whole trend!

3. Scalping

Scalpers can also make great use of trending markets in their quick ‘in and out’ trades. On the M15 here, we have a bullish trending market. After creating a new high, the market pulled back slightly, meaning scalpers would be looking for new buying opportunities.

On the M15 here, we have a bullish trending market. After creating a new high, the market pulled back slightly, meaning scalpers would be looking for new buying opportunities.

Dropping to the M5, we can see an M5 trend line break, indicating price is moving back to the upside. We then have a break of the M15 resistance level, giving a retest on the M1 timeframe. This would be a great opportunity for scalpers to enter the markets.

In Summary – How Do You Use The Trend To Trade The Forex Markets

In conclusion, the trend can be a great asset to use as a trade in the markets and should definitely not be ignored. Likewise, counter trend trading can be another great tool in the toolbox for well-experienced traders looking to capitalize on small movements and retracements in market price.  It’s incredibly important to back test any trend or counter trend trading system before testing on your live trading capital! Understanding and being able to identify market trends is also incredibly useful in placing stop losses in the markets.

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