The Trend Is Your Friend… Most Of The Time.
You don’t have to be in the field of trading for very long before you hear and begin to learn about trend.
It is mentioned in almost every type of informational/educational literature designed to reach the new trader. Furthermore, it is an ongoing theme is a trader’s development on the path to becoming a consistently profitable trader of any market.
The old adage, “the trend is your friend”, is one that comes up time and time again. Whether a trader is having a long run of profitable trades or facing a nasty drawdown after a run of losing trades, he/she will always be reminded, in some way, of the importance of truly understanding trend and its relevance in trading.
It is true that the trend is every trader’s friend; however, we need to be very diligent and careful to figure out what this really means within the context of ever-changing price action.
As most of us know the trend represents a move in price action where the price of one’s trading vehicle (in our case it’s whatever currency pair you trade) makes higher highs or lower lows. When seen on a chart, candlesticks or bars representing price action will form a stair-step pattern up or a stair-step pattern down. The idea is that when price enters into a trending pattern, the likelihood of continuation is high; hence, probabilities are stacked in favor of the trader.
Trend traders may not be extremely active traders as they sit on their hands a lot; however, they are the most profitable traders. Why? The answer to that question is, skillful trend traders find excellent entries and stay in trades for longer periods of time. In addition, they build a larger position around the original small position. This allows for a position and dollars to build exponentially within one trade.
In order to develop a true, solid understanding of trend, it is important to dig a little deeper and look a little closer at what is meant by “trend” in regards to price action.
First, you must understand that when looking for a trend on a chart, it is critical to know what time frame you are looking at. An easy way to view the trend direction on multiple time frames is to use this Simple Forex Trend Indicator.
A trend on a 1 minute time frame means something very different than a trend on a daily chart. The first point of knowledge to absorb is that price action can trend on any time frame; however, the higher the time frame the more valid the direction of the trend becomes. Furthermore, the more time frames that agree in direction the more valid the direction becomes. And, the more time frames that agree in direction with your highest time frame (which is often the daily) you watch the more valid the direction. By determining the validity of a trend through the lens of multiple time frames, the trader can determine her level of confidence in a specific trade.
Here’s An Example Of Viewing A Trend On Multiple Time-frames
Now that we know what trend means to the trader, it is necessary to discuss the positive and negative aspects of trend trading. The most positive aspect is that identifying a trend is fairly easy. The most negative aspect is knowing where to enter a trade. Even the most seasoned trader can be left sitting on the sidelines as price actions moves strongly up or down.
Let’s take a look at the challenges of trading a trend a little bit more closely. First, determining an entry depends on the ability of the trader to recognize a pullback in current price action. This takes patience and perseverance which can present a challenge to any trader because it requires discipline.
Discipline is the one area that is a “monkey” on every trader’s back. A trader who does not continuously work on developing and maintaining discipline is a broke trader.
Second, when trading a trend the trader has to be comfortable with being wrong on an entry and willing to cut it loose quickly. If the trader is not willing to exit a trade that runs against her then trading the trend will eat up the capital a trader worked weeks to build.
Last, when trading a trend the trader must develop the strength and confidence to remain in a winning trade. If the trend trader is not able to hold a trade then her profitability will be very limited because the trend does not happen a majority of the time.
The bottom line here is that it is not enough for a trader to simply know what it means to trade a trend; rather, it is paramount to the trader’s success to understand what is involved in trading a trend and what skill sets need to be strengthened to achieve success.
Profitable trading to all!
FxST Education Specialist
Dr. Debbie Badawi’s formal education, training, and career is in the field of education. Ten years ago, upon an early retirement, she entered the world of trading equities and then found her passion in day trading and swing trading the Forex Market. Although she trades various currency pairs, she spends much of her trading focus on the EUR/USD. In addition to trading, Debbie mentors other traders, works with the team at FXST, and runs her educational consulting business where parents find educational solutions for their children. When asked what’s next or what’s Debbie’s future? Debbie smiles and precisely says, “ a simple life comforted by a six figure income and a financially free retirement.”