By Admiral Markets
Dear traders,
Did you notice that trend trading is only easy on paper, but spotting a trend becomes way more challenging on real live charts?
Perhaps you feel confused when you see price action build trends in the opposite direction?
In theory, trend trading sounds simple, but in practical terms, traders are often unsure about the real trend in the market.
Today’s article is an attempt to simplify the art and science behind trend trading, which is broken down into simple and manageable steps.
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It is also important to understand the role of the trend within the market structure at the end of this article.
Trend trading can be very beneficial, but not if traders are buying or selling at trend reversal spots. Basically, trend trading boils down to these simple steps:
The problem with trend trading is that the chart often becomes confusing, and, eventually, paralysis of analysis could occur. The best approach to avoid the two aspects is to:
I will discuss my favourite tools and indicators in the next paragraphs. Feel free to check out the video below about trend trading as well!
The first critical step to understanding the trend is adding moving averages (MA) to the chart. The moving averages are a dynamic indicator as they are automatically re-calculated after each candle.
The major benefit of the MA is that you can immediately see whether the price sequence is trending or ranging:
The technique becomes even more valuable if a second MA (a third, even) is added to the chart as traders can read short, medium, and long-term trends. Here is how I use the MAs (I use the EMA close):
We now know the trend, but as mentioned above, it is critical to wait for a correction first; otherwise, the entry could occur at a top, bottom, or simply at an inappropriate moment.
The price is still considered to be in a trend, albeit in a correction, when this happens:
The moving averages help determine whether the price is in a correction, trending, or ranging after a quick glance at the charts.
On a side note, the middle of the Admiral Keltner indicator (MT4 SE) is more or less the same as the movement of the 21 EMA close. Hence, a trader can use the same indicator (Keltner) for two totally different purposes.
Trend channels are effective in measuring the trend, but do require manual work from the trader. These characteristics are pre-requisites for a trend channel to be valid:
Again, the trending structure is clear, but when does a retracement occur?
Once a channel is formed, it is important to wait for the price to build a retracement:
The trend is invalidated if the price breaks below the support trend line of the channel or above the resistance trend line of the channel. In that case, a reversal might be taking place, rather than a correction.
Source: Chart from Admiral Markets MT4 SE-EUR/USD 4h Chart, 2 March-1 April 2017
Last but not least, the Fractal indicator automatically offers a simple method of spotting the classical definition of trends:
Of course, traders can try to spot the trend sequence without the Fractal… but the Fractal indicator makes it easier and quicker to spot the trend pattern when scanning the charts.
It is important to recognise and trade the trend. In my experience, the above-mentioned tools work well, but don’t forget to try the 60+ extra features of Admiral Markets’ MetaTrader 4 Supreme Edition.
To sum up, being a trader, try to keep in mind the following:
Cheers and safe trading,
Chris Svorcik
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Article by Admiral Markets
Source: 19 Key Aspects for Trend Trading in Forex and CFD Markets
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.