Having some idea for the type of situation one is looking for can be extremely helpful. With a strategy, traders can look to focus on situations in which the market may be giving them the best probabilities of success. The future is opaque with or without a strong strategy. A good strategy can simply allow the trader to focus on higher-probability setups and situations in an effort to win more money than they lose; so that they may be able to net a profit.
As we looked at in the article, How to Build a Trading Strategy , markets will often exhibit one of three different conditions, and traders are often best served by matching their strategy with the appropriate market condition.
In this article, and the next two we will examine each of these three conditions in more depth so that traders can decide how to more adequately formulate their strategies. Of the three possible market conditions, trends are probably the most popular amongst traders; and the reason for that is what we had alluded to a little earlier.
The future is opaque, and price movements are unpredictable. By simply recognizing a trend, the trader has noticed a bias that has shown itself in the marketplace. The alluring part of this is that if that bias continues, the trader might be able to jump on the trend, and let the market do the heavy lifting of moving the position into profitable territory.
Traders are often best served by waiting for the up-trend to pull back before buying or waiting for a down-trend to rip higher before selling , in an effort to enter the position as cheaply as possible. But if the trend does continue, the trader might be able to profit by three, four, or five times the amount they had to initially risk to enter the trade.
Many of the most popular indicators can be helpful when designing a trend strategy. And to take technical analysis a step further when designing a trend-trading approach, many traders will look to utilize multiple time frame analysis in order to get multiple looks at a trending market. In the article, we suggest potential time frames that traders can look to utilize based on their desired holding times.
When utilizing multiple time frame analysis with a trend-trading strategy, traders are often going to look to the longer time frame to find and diagnose the strength of the trend.
This can be done in a multitude of ways. Other traders will look to one of the more common indicators, the moving average. After the trend has been diagnosed, the trader can then plot the entry into the position; and for that, there are a multitude of options available.
There is an old saying that goes: This one line pretty much sums up the quandary that traders are faced with when trading trends. In an effort to be as precise as possible, many traders will move down to a lower time frame in an effort to get a more detailed look at the move inside of the larger-term trend.
Some traders will use price action to enter on the lower time frame, in anticipation of the larger-picture trend continuing. Traders can also look to use indicators to plot an entry, under the premise that the longer-term trend may be at the early stages of its continuation; and can be entered upon with the shorter-term chart.
There are numerous indicator options for this premise. Traders looking to speculate with the trend want to focus ONLY on signals that move in that direction. So, for instance, if an up-trend has been found on the longer-term chart, then the trader is only looking to buy.
But the fact of the matter is that biases do exist, trends do take place for a reason , and in many cases those trends may continue. In the article Using Price Action to Trade Trends , we show traders how such an approach can be built without the necessity of any indicators at all.
Price and price alone is often enough to show traders what they need to see to decide when and how they want to enter trades in the direction of the trend. If traders want a more objective way of trading with trends, they can look to implement an indicator like RSI to trigger the position after the trend has been graded on the longer-term chart with Price Action.
While this is designed as a scalping strategy, traders can certainly swap out the time frames with those suggested in The Time Frames of Trading to make the logic of the strategy operable on a longer-term basis. Would you like to enhance your FX Education? DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss.
Price action and Macro. Traders should look to match their strategy with the appropriate market condition. Trends can be attractive since a bias has been witnessed in that particular market.
In this article, we show how traders can begin to develop their own trend-trading strategy. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event. Forex Economic Calendar A:More...