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Following the Trend in Forex |
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"The Trend is Your Friend"--You'll find this oft-quoted passage in many articles on trading Forex (foreign currency). The problem is that unless you know what it really means, it can't help you much in your trading. Furthermore, depending on your trading style, it might not even be good advice. In order to learn about following the trend in currency trading, you need to first know if a pair is really trending and then you have to decide how you're going to approach that currency pair.
The trend, generally speaking, is the basic direction a particular currency is headed. For example, if the currency pair EUR/USD is going up and has been for some time, the trend is considered to be long on the Euro. Note, however, that following the trend is not always as easy as it sounds. If you're working on the 5 minute chart and you see that all day the Euro has been heading up, you might very well say that the trend is up. But, it may very well be that for the past three weeks the Euro has been losing value and today is simply retracing a bit of its lost ground. Therefore, it is really necessary to identify the time frame you're interested in following and determining the trend in that frame.
Usually, when one speaks of a currency pair trending, the idea is that that pair has been in a definite up or down movement for the past couple of months. It may be up one day and down the next, but if you expand the chart out over the past month there is a clear direction the pair is heading.
Once you've identified the trend, you have to decide if you're ready to follow it. It may be the case that a pair has been trending down for the last couple of months but is just at a point it has reached several times during the last year, but has failed to breach. It may very well be ready to reverse, or it could break through and head to a new low.
The key for all trend following, as it really is for trading in general, is good money management and the ability to control your risk. Trend following feels great when it goes according to plan, and you may soon become overconfident in your trading and throw every bit of funds towards the trade. The market is a wily beast, and it seems to know just when to make a dramatic turn--swiping your money right off the table.
To really take advantage of trend following in currency trading, you should really get to know a currency pair well--understanding the particular characteristics that make that pair unique. Some currency pairs tend to trend more often than others while some range up and down for the most part. Learn your pair and then make well calculated trades. Keep your risk to a minimum and be prepared to manage your money well.
Following a nice, steady trend in currency trading can really lead to profitable trading. Knowing how to spot a trend and trade it well, managing your money and your risk, are crucial if you want to become an effective and successful trend follower. |
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