Perhaps you have heard of the old market trader’s axiom “the trend is your friend.” This concise and rather simplistic little bit of wisdom exits to remind you that all markets go through periods of time where prices tend to gather momentum and move in one direction or the other over a sustained period of time. When this occurs the market is said to be trending. Trending markets create opportunities for foreign currency traders to “hop on” and ride the trends they way a surfer rides an ocean wave.
It is generally accepted that there are three types of trends: There are up trends, down trends and sideways trends. In reality sideways trends are not true trends at all. In fact, we can say that sideways markets can be characterized as markets experiencing no trend at all. Profitable currency trading requires an education, and Forex traders that know their craft know that there are different kinds of trends, and these are differentiated by their duration in time. There are short-term trends, medium-term trends, and long-term or “secular trends”. This is important to know because in the exchange rate currency markets trends can exist inside other trends. What this means is that any Forex currency pair can at any time start selling off and start to experience sustained downward momentum that can last several minutes or even several hours, and all of this can happen within the context of an existing medium or long-term up trend. Indeed, trading currency profitably means realizing that there are trends within other trends.
As stated above, trends can exist inside other trends. The best way to look at this is to think about the ocean tides. A rising tide means that the ocean is moving closer to the land, but even when the tide is rising, the ocean waves will always recede and pull back after they come ashore, In this example we can say that the tide is the long-term trend, and the waves pulling back into the ocean represent the very short-term trend. Experienced traders are aware that all market trends are most powerful when the the longest-term trend is in harmony with the trend that they are following. If a particular Forex trading system produces a signal to enter a market on the long side, the smart trader will only do so if the currency pair he is following is already in an up trend. Moreover; he will not pull the trigger on such a trade unless he can confirm that the trend he is trying to exploit is also in harmony with the trend within the next higher time frame. In other words, if he is trading off the five minute chart and looking to buy, then he will want to confirm that the trend showing on the hourly or four-hour chart is likewise in a bullish mode.
Foreign exchange rates fluctuate in what seems like totally random patterns. Most of the time this is exactly what is happening, but by taking a good look at the chart of any currency pair, you will see that there are times when it seems like that pair is moving in one direction. These are the trends, and identifying them and knowing how to ride them is the key to winning at the Forex trading game. Trading online is challenging and can at times seem like a complicated video game, but the online trader has the advantage of real-time charts which means that they can track the trends by employing some time tested methods. Chief among them is the moving average lines method. Moving averages are calculated automatically by the computer program driving the charting software. When a trader plots two moving averages of different durations (i.e. a 21 day moving average vs. a 50 day moving average), on the chart, it will be apparent that one of the moving averages is gaining on the other. If the shorter-term moving average appears to be above the other, then we can conclusively say that we are in an up trend. The reverse is true when the longer-term moving average appears above the shorter one.
Some of the more profitable trading systems call for the trader to enter the market when one moving average line crosses another. This is their trigger point or market entry signal. The time to exit the trade is when that condition reverses — the moving average lines cross over again, but in the opposite direction. There are dozens of trading systems that employ moving averages in one way or the other. As a trader you will no doubt try several of these out before you arrive at your own trading style. No matter what method you use to trade Forex, always try to remember to trade only when the longer-term trends are in harmony with the ones you are trying to exploit, because when you do, you increase the probability of a positive outcome. After all, the Forex trend is always your friend.
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