The Idea Behind Following Trends

Filed under: Learn Forex Trading |

Screen shot 2013-02-14 at 10.14.52Trend following systems are perfectly logical and is a good methodology to employ for traders. However, there are several problems associated with trend following systems, and I would like to talk you through one or two of these problems in today’s forex-related article.

 

To begin with, there is the problem of entry. How do you know when a trend is beginning? The fact is that you don’t – and it is only when the trend has been forming for some time that it emerges as a ‘trend’. So what can you do? Once a trend has been established, you can confirm it with both a visual inspection and the crossing of some moving averages. So, if the chart is visibly moving up from left to right, and say an 8-day exponential moving average is crossed above a 21-day exponential moving average, then you can be fairly confident that a bull trend is present. Conversely, if the chart is visibly moving down from left to right, and the 8-day exponential moving average is crossed below the 21-day exponential moving average, then you can be reasonably sure that a bear trend is present.

 

Once the trend has been established, you need to find an entry. Perhaps the best way to do this (in a bull trend) is to wait for a pullback to an area of previous resistance that then becomes new support. If a bullish price action signal forms at such an area, then enter the market with a risk-reward scenario of at least 1:2. It is also difficult to predict when a trend is ending, so it is probably best to keep taking nibbles out of the trend in this way, and to keep entering on pullbacks. By doing this, you might not ride the trend all the way up (or down), but you will certainty take a few bites out of it to add to your trading capital.

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