Trade with the trend’ is an old trading adage that has proved to be effective in the generation of consistent profits. Trend trading is a popular trading strategy where traders seek to profit from an underlying trend either a downtrend or uptrend. For this reason, technical traders, as well as forex expert advisors, deploy a number of forex trading instruments to identify the long term trend as part of trend trading.
Long-time frames are the best for determining trends for traders focused on positional trading. However, for traders or forex robots engaged in scalping or swing trading, shorter time frames are often used to determine the underlying trend.
Using Moving Averages to determine Trend
Moving averages are some of the best forex indicators for ascertaining trends in the forex market. In this case, we are going to use 20 interval period exponential moving averages and 55 simple moving averages to determine an uptrend and a downtrend.
A closer look at the chart above, it is clear that the 20-EMA is above the 55 SMA from 2004 to May 2005, with the moving averages sloping upwards. As long as the 20 EMA is above the 55-SMA, the same is interpreted as an uptrend, and price often tends to trend upwards.
The price continued to trend upwards until August 20O8 when the price reversed downwards. Likewise, the end of the uptrend was confirmed in August 2008 as the 20EMA crossed the 55SMA from above signaling price is now in a downtrend.
Trend Trading Strategies
4 Hour Trend Trading Strategy
The 4-hour trend trading strategy exploits the popular saying that the underlying trend is your friend. Likewise, we use 34-period and 55-period MA to determine the underlying trend and the 1-hour chart for determining entry and exit points.
With these strategies, traders or automated FX trading systems can eye buy opportunities when the 34MA is above 55MA and sell opportunities when the 34MA is below the 55MA signaling a downtrend.
As it can be seen in the 4-hour chart of EUR/AUD, the price is trending downward as the 34MA is below the 55MA. In this case, a trader or other forex trading instruments would enter short positions as soon as price touches the 34 or 55 MA on a correction upwards, resulting in the formation of a big bearish candlestick.
The moving average acts as a resistance level, whereby price bounces off and starts to move downwards. In this case, a trader would enter a sell position as soon as price closes below the moving average on the 1-hour chart.
Enter and Let Run Trend Trading Strategy
The strategy is for the most conservative traders or forex robots that wish to take a limited number of trades. The strategy entails identifying the long term trend and placing a trade in the direction of the trend. The position is left to run in line with the underlying trend.
A trader or an automated FX trading system would close the position only when the trend reverses and starts moving in the opposite direction.
A closer look at the first half of the chart above, it is clear that price is trading upwards above the 200D Moving Average. In this case, traders or forex robots could have entered trades as soon as price touched the 200MA from above and failed to breakthrough. It is clear that a trader who entered long at position 1 stayed long as the price was above the 200MA
A sell position, on the other hand, would have been triggered at position four as price struggled to move upward after a pullback from an initial breakout.
Trend Trading: Double Bottom and Double Tops
Whenever double tops and double bottoms appear on a trending chart, they signify that the underlying trend is slowing and losing momentum.
The chart above shows EUR/USD trending lower starting in May 2009. However in March the same year, price formed a double bottom indicating that the downtrend had lost its momentum and that price was about to reverse upward as part of an emerging uptrend
The Uptrend from the double bottom was confirmed on March 30 as the 20 MA crossed the 55 MA from below, signaling a strong uptrend.
Moving averages are some of the best forex indicators for identifying underlying trends as part of trend trading. For positional traders looking to hold positions for week’s months or even years, the indicators should be used on longer time frames to identify long term trends.
Once a trend has been identified a trader or a forex robot can open a position in the direction of the trend and let it run as long as the price above poor below the underlying long term moving average. The idea with trend trading is to stick with the trend until a reversal occurs.