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Blog - July 11, 2012

The Importance of Trend Trading in Forex

I thought I would do something a little different today and instead of posting a complete forex trading recap I wanted to talk a bit about trading with the trend.  There are a number of ways to define a trend and it’s not really as simple as it first appears.  We might be able to look at Daily or Weekly charts and quickly identify the overall trend when they’re zoomed out but when it comes to day trading it’s never that easy.
This is especially true when trading forex, where we see not only very strong and extended trends but also markets that swing quite violently in a short period of time like they did today.  We need something flexible enough for these rapidly changing conditions.  There are also key times of day where the market can literally turn within minutes and if we aren’t able to identify those turns quickly and find a trade early in the move we might miss out on the whole thing.
For these reasons I’ve found that the easiest way to define a trend while day trading is to use a moving average that is consistent day after day so that we can develop highly repeatable setups to trade in line with it.  The trouble with most moving averages however is that they either have too much lag or if the period is reduced to compensate then they end up turning way too often. Ideally we need something that not only reduces lag but keeps the MA as smooth as possible during transitions and turns.  Unfortunately we can’t have everything and perfection isn’t possible in the markets but we can at least get close to that ideal.  What I use is no big secret (experienced traders likely recognize it) but I’ve found it highly effective at fitting these criteria as you can see in my various videos where we take these sorts of trading setups over and over again.
Of course, a moving average alone is no Holy Grail and is only a small part of how we trade forex.  You can’t just go long above it on every bar or short below and expect to be profitable.  You still need to know that you have the short-term momentum on your side and the right price action patterns before you pull the trigger but the bottom line is that having something like this to help define your trend frees up a lot of mental capital for other tasks.
I wanted to post this video to get you to start focusing a bit more on the trends on display and just how important it can be to quickly define them and trade them if we want to get the most out of each day.  As a forex trader you generally want these kinds of trend trades to be the bulk of what you do.  They are often the safest trades, have solid reward/risk, and happen every day with the various setup criteria we look for.  They are also much easier to trade in many cases compared to setups on time-based charts.  You can see when you compare the range bars to the 5 Minute chart that it is a considerable difference in terms of the information the chart provides in these types of markets .  As someone who traded M5 for years I can say that switching to range bars for the majority of my forex analysis has allowed for major improvements in being able to identify and trade these intra-day trend changes in fast moving markets.