Trend lines are everywhere in forex pairs. They appear at all time frames. Yet profiting from them is far from easy. We’ll show two different trend following strategies and look at how to avoid common failings.
When to Enter and Exit a Trend Trade
The ideal scenario is to time the market so you’ll enter exactly as a trend starts and exit as the trend finishes. Yet unless you can see into the future this is near impossible. It’s better to accept from the outset that you’ll give up a bit on the entry and on the exit.
Identifying trending opportunities
This is always true because in order to identify a trend in the first place, the market needs to start moving in a certain direction.
So the key to trend trading is firstly to identify that the trend is established. Then secondly to identify suitable entry and exit points.
Trend Following Strategies
When you trade a trend, you have to either take a long term or a short term view. Taking a longer term view you can attempt to “ride” a trend for as long as possible. Buy and hold if you like.
Alternatively, with a short term approach you can “scalp” smaller profits by entering and exiting at tactical points using a swing trading system. There are pros and cons to both.
By taking a longer term view you reduce costs, and account turnover. It reduces the time you need to watch the market. Shorter term strategies are higher risk but also higher reward.
SMA / EMA Crossover in Short Term Trend Following
Figure 1 shows the difference between the two styles. In any uptrend, the short term trend trader buys, or accumulates his position, at dips in the trend. He sells (reduces his position) at the peaks. In a down trend, it’s the other way around. This is the theory. However timing these entries and exits is no easy task.
With this trend trading style, you can use the moving averages. The simple moving average ( SMA ) and the exponential moving average ( EMA ) both have their uses. The EMA is usually preferred though because it gives more weight to more recent moves in price. The next step is to examine crossovers in two moving average lines.
When the fast EMA cross down through the slow EMA it means the price is accelerating down faster than the average rate of the trend. As defined by the slow EMA . On the other hand, when the fast EMA crosses up through the slow EMA , the price is accelerating up at a rate faster than the trend average. The turning points in the lines are also useful. Using this kind of simple analysis, you can estimate where the peaks and troughs are happening with some success.
Long Term Trend Following Strategy
Trying to time the peaks and troughs in a trend is risky because it’s prone to mistiming. Oftentimes, what was planned…
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