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The Basics of Following the Trend



Jul 22, 2014   1102 
Becoming a trend following trader requires patience and time, but for those unable to consistently watch the market, this may be a solution.

Previously, I wrote that the strategy is not trend following. In this article I will explain what trend following means and what strategies are used to trade that way.

 

First, what is trend following?

In the Forex market, prices are continuously moving in particular trends, there are three types of trends: Up trend, Down trend and Sideways trend. Trend following means that you would place a trade according to following whether the price is moving in those particular occurrences (up, down or sideways). If the price is moving up in an up trend, then the trader should place a buy position, expecting the price to move higher and therefore earning profit. Similarly, following a down trend would then mean the trader places a sell position, predicting the price will move down, gaining profit. With the sideways trend, traders should not place any trade due to the way this trend moves, making the market difficult to predict.

Trend following traders are called swing traders. Swing traders hold their position for a few days, even weeks, attempting to ride the trend as long as possible and thus capturing a larger price move or more pips. Swing traders are usually people who also hold day jobs, who are unable to check the market regularly.

So what is the best trend following strategy to be used? Professional traders use moving averages and trend lines to determine which way the trend is going. The most common moving average that they use is 200 EMA (Exponential Moving Average). If this average is moving up and the price is above the average line, this is an up trend. If this average is moving down, and therefore the price is under the line, the trend is down.


Another way swing traders determine the trend is by using a trend line. For an up trend, traders draw a line connecting a series of lows, which gradually increase with a connecting minimum of two lows. To determine a down trend, traders draw a line connecting a series of highs, which gradually decrease with a connecting minimum of two highs.

The rule of entering the trade by trend following is to simply buy on the dips and to sell on the rallies.


Becoming a trend following trader requires patience and time, but for those unable to consistently watch the market, this may be a solution. In my next article, I will go into more details about trend following strategies.

 

Happy trading
Rico FY


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