Well, that could not be more true when it comes to trading. Being able to identif y the trend on a currency pair… the direction in which the pair has been moving fo r an extended period of time… will benefit a trader greatly. Trading in the direction of the trend on the Daily chart is like running with the wind at your back. Except that , when trading, the trader has the momentum of the market behind their trade.
The first step in determining the trend is to check the Daily charts of each currency pair, and look for the strongest trend in either direction. If a trader is not sure of the direction, choose another currency pair as we are looking for the strongest available trend to trade.
We can see on the chart above, simply by looking at price action , that the pair is in an uptrend. In addition to visually seeing the trend of the currency rising to toward the top-right corner of the chart, we can also confirm the uptrend by noting that the pair has been building higher highs in green and higher lows in red as it moves up.
When trading an uptrend, an excellent strategy is to wait for a pullback to a support level and then take a long buy position in the direction of the Daily trend.
On the chart above, once the uptrend has been established, a trader could take a long position near the points denoted in red on the chart. The stop-loss would be placed below the lowest point that the price had traded in each of those pullbacks. The opposite would be true when trading a downtrend. The downtrend is identified when the pair has been building lower highs green and lower lows red. In this case, the trader would sell into the downtrend by waiting for a pullback to a level of resistance green and then taking a short position in the direction of the Daily trend, with a stop above the highest point to which the pair traded in the pullback.
The key here is that by trading in the direction of the Daily trend, the trader will be entering trades that have a greater likelihood of success since the momentum of the entire market is behind them.
While pips can be made trading against the trend, any pips earned in a countertrend trade will come with a much greater level of risk associated with them. As traders, we want to eliminate as much risk as possible from each trade. You should now have an understanding of the way to determine the trend of a currency pair.
To contact Richard, please email instructor dailyfx. New to the FX market? In the course, you will learn about the basics of a FOREX transaction, what leverage is, and how to determine an appropriate amount of leverage for your trading. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Determining the Direction of the Trend. Below are a few examples of a currency pair demonstrating a strong trend. Foundations of Technical Analysis: Classic Chart Patterns, Part I.
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