Trend following is one of the most popular long-term Forex trading strategies – and for a number of reasons: it can be very profitable when market conditions are favorable, its methodology is simple and straightforward, and there are many traders who have used the strategy successfully. Although the technical aspect of trend following strategy is quite simple than other Forex trading strategies, before everything else, you need to be disciplined, patient, and possess sound money management skills.
Trends result from crucial underlying economic factors that you may not be familiar with if you are a beginner or if fundamental analysis isn’t your thing. However, the simple patterns that are created by the price actions following the various economic events can be identified by simple methods that can easily be learned. Accordingly, traders who are just starting have equal chances of succeeding just like experienced analysts, if they can control their emotions and trade logically.
To apply trend following strategy with your account at cmc markets, it is vital to be aware of or understand the existence of a trend. If you cannot identify a trend, you will be gambling – and that’s never the purpose of Forex trading.
Both technical and fundamental analysis can be used in trend identification – and both have their pros and cons. Nonetheless, it is always a great idea to try and use both of them when deciding on the features of a trend and deciding on the entry and exit points.
Leverage on Price action
There are a plethora of indicators that you can integrate on your charts to ‘assist’ you identify a trend. In fact, many traders spend a lot of money on trend-following software or indicators which just end up confusing them and making the trend discovery process more daunting than it should be.
The best way of identifying a trend is a visual observation of the market’s price action. Simply observing the raw price action of a market, from left to right is the simplest and most effective method of identifying a trend and spotting high-probability entries within the trend.
Remember, a trend is never a strategy by itself but an additional point of confluence that goes a long way in boosting the probability of trade.
Picking Your Markets and Trend Following Time Frames
To be a successful trend following trader, you need to pick the right trading markets and time frame to follow your trends. Why pick markets instead of a market? Well, if you are a trend follower, it isn’t wise to limit yourself to trading just a single currency pair because you can never predict accurately when one pair will trend and when one will go sideways.
The more currency pairs you choose to observe, the more opportunities you will have of catching profitable trends. It is recommended to start with the common currency pairs– AUD/USD, EUR/USD, USD/CAD, and USD/JPY and – though you can always add more pairs over time as you master the game of handling multiple pairs concurrently.
If you are going to apply the trend following strategy, you should endeavor to view your chart after 1 hour or 30 minutes timeframes. Again, you need to have higher time frames of 4 to 6 times your current timeframe open so that you have an idea of long term market trends.
This is just a guide and what many traders favor. In fact, there are people who have had tremendous success in using more than 1-hour timeframes or even daily timeframes to do their trading, so it is upon you to define and choose your preferred time frame and stick with it. However, you should avoid shorter time frames (such as 5 minutes timeframes) because such timeframes tend not to sustain for longer periods that are required to ensure positive ROI in the long run.
In a nutshell, to be a successful trend follower, you shouldn’t be hasty to make profits. Instead, exercise patience and follow the basic rules of trend following strategy to profit more from your trades. Additionally, try as much as possible to avoid sideway markets because they will simply kill or lower your chances of making any profits from your trade.