Though forex markets show a significant level of volatility, currencies also show strong trends. In order to become a successful forex trader, you need to identify these trends and learn to follow them.
Types of Trends
When the average price of a currency moves to a particular direction repeatedly then that is termed a trend. There are three types of trends found in the forex market: Long term, Medium term and short term.
The trend that has duration of greater than 6 weeks is called a long term trend.
A medium term trend lasts from 1 to maximum 6 weeks.
Finally a short term trend occurs for a very short period of time - from 30 minutes to a week.
Most of the successful traders made their fortune by following either long or medium term trends as they are easy to identify and less risky to trade. In contrast, short term trends often reverse suddenly, and the increase trading costs of moving in and out of positions means that short term trend following is less profitable.
Causes of trends
The economic condition of a country plays significant role in the occurrence of a trend regarding its currency. Good economic conditions appreciate the value of a currency relative to others whilst a negative economic outlook depreciates the currency. Since the economy of a country changes fairly slowly, the trends can be quite long term.
The trend of a currency depends on perceptions of traders, based on known economic information. Traders often come to a consensus, and this opinion tends to result in trends.
Also when a trend is identified, the majority of the traders tend to follow that which reinforces the trend.
Profiting from trends
Identifying a trend and knowing the entry and exit point of it is the key for your success in forex trading. Every currency has its own trend with unique characteristics. You can identify the trend of a currency by comparing its present price movement with historical data. You need to enter the trend on the basis of its direction. When you see the trend is about to exhaust, close your trades.
For example, if US dollar loses its value against the other major currencies, you can recognize the trend regarding this and can buy EUR/USD pairs. You need to set the stop loss point in a level where the stop will only get activated if the trend changes its direction. You should not over- leverage yourself as you are going for the long term trend and need to withstand some short term adverse movements. You can understand the movement by closely observing the price chart.
About the author:
Jubair Ahmed is a senior writer/analyst for My Forex Trading Help, an information site offering free tutorials on becoming a successful forex trader. |
