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Following the Trend

Following the (Forex) Trend

Technical analysis a must-have skill for the forex trader. If you can’t read forex charts, you can’t trade forex successfully. Period.

When you’re looking at FX charts, one thing you need to always keep in mind is the concept of trend. Currency pairs trend, either up or down, in a much more predictable (and, thus, potentially profitable) fashion than, say, stocks, which rise or fall in a much less organized way. When trading forex, the trend is most definitely your friend.

But how can you recognize a trend that’s worth following?

There are several factors to consider.

Forex Trend Basics

There are certain tell-tale signs that a currency pair is in trend mode, rather than “range-bound,” which is when currency pairs chop up and down not going much of anywhere.

Trending currency pairs typically exhibit the same characteristics. If you see a lion with a mane, it’s a male. Likewise, if you see a currency pair hitting higher highs and then retreating back to higher lows, that’s a sign that you’re seeing an uptrend.

If you’re seeing a currency pair hitting lower lows and then creeping back up to lower highs, then you’re most likely in the presence of a downtrend.

Sometimes it really is that simple, so don’t be afraid to be that simple with it.

Set Your Trading Timeframe

Delving a little deeper now:

Timeframe is one of the key elements of identifying a trending currency pair. Some trends are mountains or valleys that rise or fall over months or years, but if you’re a short-term forex trader, that trend won’t mean much to you.

For this reason, it’s good to know the timeframe for your trading style, and then search for trends that fit within that timeframe. For instance, you’re a short-term pip scalper, you’ll want to view a one hour chart and ride a trend for maybe 20 pips, then get out.

If you’re a longer-term trader, you may want to base your trading decisions on a weekly or even a monthly chart.

The concept is the same, though: you’re always seeking that trend, that uptrend with the higher highs and the higher lows, or that downtrend with the lower lows and the lower highs.

It is possible for the trend to be down on a minute to minute basis and be up on an hourly basis, yet up again on a daily basis and maybe down again for the week. Any permutation of this situation is possible, and you can trade based on any trend timeframe.

What you want to do, to make sense of it all, is to pick a timeframe that you can really study and come to know, and then trade within those parameters, following the trend.

Most successful FX traders trade with the trend, but it is possible to trade against it if you really know what you’re doing. However, counter-trend trading is not recommended for beginners. You can really get your head chopped off betting against a trend.

View Your Trend Trades In Different Timeframes

Once you spot out what a trend is doing in your timeframe, it’s time to observe what the trend is doing in other timeframes. An industry standard rule of thumb is to evaluate a trend in a timeframe 4-6 times greater than the one in which you are trading.

If you are trading by the hour, then, you might use a four hour chart to predict your trend (4x the hourly chart). 

Similarly, if you are trading in four hour increments, you might use the daily chart to predict your trend (6x your window). 

If you are trading on a daily basis, try the weekly chart to predict your trend (5x the daily trade).

Up or Down: But Which Currency Is Driving the Trend?

An uptrend is an uptrend for the base currency at the same time as it is a downtrend for the quote currency. Similarly, a downtrend is a downtrend for the base currency at the same time as it is an uptrend for the quote currency.

These events are mutually exclusive, meaning that one currency moving up means that the other is moving down, and one moving down means that the other is moving up.

But this may only be true when you’re viewing the currency pair as a pair. That is to say, USD could be strengthening against the Yen, but that does not necessarily mean that USD is strengthening against the Euro.

You have to be careful that you don’t mistake a trend in USD/JPY, then, for a trend in the U.S. Dollar in general. You have to make a determination as to which currency, either the base or the quote currency, is the currency that is driving the trend.

Get Out Your Crayons and Draw Trend Lines

When you’re looking for trends on a forex chart, it’s best to be an active participant in the chart. Get out your red pen and draw trend lines; seriously, do it, like actually get out a pen (or a virtual pen) and draw lines that prove that you’re seeing a trend.

Your trades won’t always be picture perfect, but you’ll be surprised how accurate trend lines can be, if you take the trouble to put them in writing.

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