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Forex traders who rely on a strategy called trading trends can also use various methods of technical analysis to achieve greater precision with their trades. In this post we discuss methods of technical analysis that you can use for trading trends in the markets.
Trading Trends Is Only One of Several Trading Strategies
Other Forex trading methods such as range Forex trading or breakout Forex trading are just as suitable but not as popular as trading trends.
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Moreover, trends vary depending on the type of asset class you are looking at. Generally, trends are more pronounced in commodities. In many cases this is because commodities such as natural gas, grains, are seasonal in nature. Additionally, demand for certain commodities naturally rises and falls.
However, trends in the Forex markets are not so seasonal. Instead, trends having to do with currency pairs are more dependent on economic and other factors. This makes trends in the Forex market less predictable.
For example, the EURUSD was in a clear upward trend during December 2016 through late January 2018.
But the trend for that currency pair reversed itself in January 2018 and has been descending since then. Once Forex traders become aware of such trends, they can position themselves to make greater profits from the changes in theses trends. This is the heart of the strategy that Forex traders refer to as trading trends.
How Do Traders Use a Strategy of Trading Trends?
A Forex trader whose strategy is based on trading trends will first identify an already-established trend in the market. Then they look for the turning points in that trend. This allows them to find the best price entry points so they can ride that trend.
Additionally, Forex traders who rely on trading trends also turn to technical analysis. This allows them to create their own trading systems for trading trends as they notice them in the markets.
If you are a Forex trader who relies on trading trends, following are some of the methods of technical analysis that you can use in conjunction with your trading strategy.
1. Use the High Low Method to Predict Changes in Trends
Trends tend to correct themselves naturally. This can lead to different segments of trends. For example, the monthly trend might be moving upward, but a four-hour chart could show a downtrend. This is nothing but a correction to the major uptrend. If you’re a Forex trader who’s trading trends you already understand this.
The High Low Method can indicate to Forex traders when a trend might end or weaken. For example, when a recent price level is down on the four-hour chart, this might be an indication that an upwardly moving trend is coming to an end—or not. If you’re trading trends, you will want to check the daily chart and see if it signals the same.
2. Draw Trend Lines When Trading Trends
The trend line itself can allow you to make a prediction about when price levels will rise or fall.
To use trend lines when trading trends, draw diagonal lines that connect two highs or two lows. In this way, you will be able to tell more easily whether a particular trend is resuming or beginning to move in the opposite direction.
3. Look for a Divergence
The oscillator divergence is one of the best technical indicators you can use when you’re trading trends.
When two data sets fail to move in tandem, this is called a divergence. In other words, when a price is moving higher, traders also expect the oscillator to behave similarly.
When a divergence such as this one occurs, it can point to potential corrections in price. If you’re trading trends, you can use a divergence as a tool for choosing the best points for your trades. You might even combine it with the retracement method for greater precision. When you can predict the best turning points you will know when to enter a trend.