Trend-following strategy in forex

 

A trend-following strategy is a type of trading system that attempts to take advantage of long-term price movements to make profits. These systems can be used in several markets, but are most commonly used in forex, where large price swings can occur over short periods of time.

How it works

The basic concept behind trend-following is very simple: identify the prevailing trend and trade in the direction of that trend. This can be done in many ways, but most commonly involves using technical indicators such as moving averages or MACD (moving average convergence divergence) to identify when a security is in an uptrend or downtrend.

Once the trend has been identified, traders will enter into trades with the expectation that the price of the asset will continue in that direction for some period of time. This is often dictated by trader risk-preference, with shorter-term trend-followers looking to hold trades for days or even hours, while longer-term traders can look to hold trades for weeks or months.

Price action traders who believe that trends form through repetitive patterns known as “fractals” will buy at support levels and sell at resistance levels to capitalize on these recurring phenomena. A fractal forms when a chart pattern repeats itself over time, with each repetition having increasing amplitudes.

It’s all about supply and demand

Trend-following has been criticized by many academics and market professionals alike, with most arguing that trends are not random phenomena but instead occur naturally within market dynamics of supply and demand. Some academics have even gone as far as to argue that trend-following is more akin to pseudoscience than actual trading methodology, with investors better off investing passively rather than trying their hand at “complex statistical formulas” which are no more effective than simply adopting a buy-and-hold strategy.

The main problem associated with trend-following is the difficulty of identifying reliable trends before they begin. It has been suggested by many academics that pure randomness can often create temporary trends within financial data, meaning it is difficult for traders to pinpoint which movements are real and which ones are false signals before beginning trades. This means that trend followers need not only good timing skills but also acute market insight to be successful.

Despite the criticisms, trend-following remains one of the most popular strategies in the forex market. Many retail traders find it attractive because it is relatively simple to understand and can be implemented with a limited amount of trading capital. Additionally, many trend followers use mechanical trading systems which remove emotion from the equation, thus increasing the chances of success. There is no one perfect trend-following strategy, as each trader’s risk preference and trading style will dictate the exact indicators and rules they use.

However, many trend followers tend to follow similar principles, which can be summarized as follows:

  • Identify the prevailing trend and trade in the direction of that trend
  • Use technical indicators to identify when a security is in an uptrend or downtrend
  • Enter into trades with the expectation that the price of the asset will continue in that direction for some period of time
  • Use price action techniques to buy at support levels and sell at resistance levels
  • Use a mechanical trading system to remove emotion from the equation
  • Have good timing skills and acute market insight
  • Be prepared to suffer short-term losses to achieve long-term gains

In conclusion

The trend-following strategy is one of the most popular strategies used by retail traders in the Forex market. The basic concept behind this strategy is very simple; identify the prevailing trend and trade in the direction of that trend. This can be done in many ways, but most commonly involves using technical indicators such as moving averages or MACD (moving average convergence divergence) to identify when a security is in an uptrend or downtrend

Once the trend has been identified, traders will enter into trades with the expectation that the price of the asset will continue in that direction for some period of time. This is often dictated by trader risk preference and trading style. Some trend followers will use price action techniques to buy at support levels and sell at resistance levels, while others will rely on a mechanical trading system to remove emotion from the equation.

 

 

 

 

 

 

  A trend-following strategy is a type of trading system that attempts to take advantage of long-term price movements to make profits. These systems can be used in several markets, but are most commonly used in forex, where large price swings can occur over short periods of time. How it works The basic concept behind…

  A trend-following strategy is a type of trading system that attempts to take advantage of long-term price movements to make profits. These systems can be used in several markets, but are most commonly used in forex, where large price swings can occur over short periods of time. How it works The basic concept behind…