The most Popular Forex Trading Strategy – Trend Following.

Trend following is maybe the most popular long-term strategy in all monetary markets. It is exceptionally effective and beneficial when the conditions are favorable, is quite uncomplicated in its methodology, and there are many persons who have exercised this strategy to victory and riches. We must note that the technical part of trend following is in fact pretty easy, but also that it requires discipline, correct money management, and patience. Trend following strategy is not short-term, and persistence and determination are as essential as correct analysis as an outcome.

Trends are produced by powerful underlying financial factors which may not be all that understandable to those who are unfamiliar with fundamental analysis. But the simple patterns formed by the price action in reaction to the economic events can often be identified through methods that are simple to learn and apply. Thus, the retail trader has as much possibility of success as skilled analyst if he can control his emotions and perform reasonably.

To apply this strategy we should first be aware of the existence of a trend. Without identifying a trend we would be gambling, and that’s not the idea of trading FX. Both fundamental and technical analysis can be engaged for identifying a trend, and both of them have their advantages and disadvantages. It is a good idea to use a mixture of them for deciding on the trend’s nature, and deciding on our entry and exit points.
To use trend following method, you must first decide whether you want to employ technical or fundamental analysis for your method, or a mixture of both.

The fundamental analysis can supply you with information which can forecast the strength and length of a trend, while technical analysis can show you how it builds up. It is likely to base your strategy on one of these to the exclusion of the other, and it is still possible to turn a profit if you are lucky enough, but we have to reduce the role of luck to as slight as possible. Fundamental analysis is more trustworthy than technical analysis in defining a trend that has long term potential, but without technical analysis it would be very difficult to choose at what time or how to trade. Technical analysis can propose the start of a trend, but it’s unlikely to tell much about the length or strength of the same. Thus, you may use both technical and fundamental methods for your trend following strategy, with fundamental factors removing the false signals of technical analysis, and technical tools provide you with a time-price frame for deciding on access points.There are a lot of technical tools that can signal the existence of a trend, but there are an equal number of false signals generated by them. There are only three types of trends that can be present at any time: flat, up or down, and it is likely to consider of trends between any two points on a price chart. Simply take two casual points on a price chart, draw a moving average on it and the pattern that comes up can be analyzed as a trend. Thus it is always essential to have at least some basic understanding of the financial factors that can generate trends, before deciding on the accuracy of a chart pattern. You can do that by familiarizing yourself with the big picture; understand what drives market contributors; be aware of the stage of the trade cycle.

A trend can be formed when there is some motivating certainty behind the price action which allows the trader to easily identify it visually. The trend that we search to trade is dissimilar from random variations, range patterns and comparable price movements in that the price itself, in the absence of any technical indicator, can still be recognized as showing a trend. Consecutive highs and lows should represent a rising or falling pattern in an uptrend or downtrend respectively, with relatively few irregularities. But such a case is frequently a rarity, and the trader will have to back his technical patterns with assurance that may only be gained through fundamental analysis.

Even though a trend can be identified without any technical tools, we still need technical tools to trade it, and time it. The main principle of a trend following strategy is, recognize the trend, identify counter-trend moves, and use them to enter a trade in the direction of the trend. Market timing in the background of a trend, with the intention of picking the counter-trend extremes, and using them to enter a trade, is required and beneficial. Also remember market timing never works when one is trying to expect reversal points on only a technical basis. The basement of all trading is to utilize short-term irrational behaviors of the market in order to enter into long-term positions in positive alignment with basics. 

A trend follower should maintain his position for as long as the fundamental reasons that support the trend are leading. A trader can use technical patterns to time his exit point when he cannot recognize those reasons, or if he doesn’t trust for some unfathomable reason, that they are functional. Even if the trader is attentive to the fundamental reasons, and is able to calculate them correctly, technical analysis can provide him with a very useful early advice system. If the price action is suggesting powerfully that there’s some fault in the trader’s fundamental point of view, he can use the technical signals as an occasion to have another look at his fundamental picture. 

The best tools for trend following are produced by moving averages with simple price charts. Bar charts, candlesticks and many others can be similarly useful if engaged with moving averages. For instance, between October, 2007 and May 2008, the price action of USD/SGD always stayed below the 100-day moving average. And when the pattern collapsed, in June 2008, the trend had also broken down, and the price went on to crack the 200-day average, and a medium-term rising trend was formed. It is also possible to use changing average crossovers, and countless other methods, but any method you decide to use, you must ensure that you do not obscure the main feature of your strategy, which is trend following.

If you are a weekly or daily basis trader, the 100-day MA will most likely be able to capture the majority of the main trends for you. Anything with a longer time frame is likely to be insignificant because of too much data discarded, and a shorter time frame that is way below the 100-day period may be too responsive to price action. But as usual, one can use other timeframes below 100, given that he doesn’t mess his monitor with lots of indicators, charts and tools.

When trend following, placements of stop-losses and take profit orders depend on the term and environment of your method. A stop-loss order can be placed a short distance above or below the trend line, whether it is presented by the moving average, or a simple line drawn on the chart. And the trend follower should not recognize his profits until he has a very good explanation to do so. The principle of this strategy is to focus on underlying price dynamics by stripping out instability and short term movements, and there is little reason to realize profits in response to variation which are irrelevant to the core action of the trend. So the conclusion is to go as far as the trend goes and then you can take your profits. You can use the market analysis to decide how far a trend goes, but it’s far better to discover the fundamental reasons behind a trend, and then to exit the trade once those causes are no longer sustainable.