Forex trend trading is one of the most common strategies in Forex markets today. The other is range-bound trading, but more on that in later texts.
What is Forex trend trading strategy?
Forex trend trading strategy relies on the momentum in the price movement of a currency pair or pairs. Forex trend traders capitalize on identifying trends and making deals that favor their financial interests – long positions for upward trends, short for downward trends. Needless to say, in order for this strategy to work, the momentum has to last for the predicted amount of time. If misidentified, it could result in staggering financial losses for the Forex trader. Likewise, if a trend trader underestimates (or worse yet, overestimates) the force behind a Forex trend, this will likely result either in a perceived loss – the trader sees the trend continuing significantly longer than anticipated, and thinks he could have made more money off of it – or the loss of self-confidence (failure can do that to people). Another thing to keep in mind is that every trend, no matter how strong, has its reversal – all Forex trend traders know this.
Birds and worms…
In order to get the most out of a Forex trend, it is imperative to get in on it as early as possible – be an early bird and the worms will come, at least in Forex markets. However, it is just as important to know when to quit. The moment Forex trend starts reversing is a moment too late – you should have pulled out by then, so do it now and move on. From that point onward, there is no rational reason to hold onto it. Luckily, with Forex markets being as liquid as they are, most Forex traders never have to face the problem of not being able to sell off their positions, even on short notice, and gap risk is not an issue either. The prices will not change by the time you make the trade, as Forex trading is usually faster. The key word being “usually”, so be careful. Do not be mislead, it does happen even in Forex markets, but this is less of an issue than in other markets.
Statistically, more traders lose out on Forex trend trading than they win. In fact, even the best Forex trend traders in the game have been burned a couple of times. What made them best, however, is the fact that they never risk more than a few percents of their capital in a trade (that, and their superb talent and instincts, but whatever). By limiting the amount you stand to lose, you secure a lifeline for you and your financial assets, should the worst happen. In addition, it is advantageous to open trading account by prestigious broker who also offers daily market analysis.
When it comes to Forex trading, trend or otherwise, the importance discipline and nerves (see our article here on trading psychology) of steel cannot be overstated. That, and some smart investing can really impact your bottom line, in a good way.