How to Use Technical Analysis to Trade Trends
There are many advantages to trend trading! Especially for retail forex traders who don’t have the time to sit in front of their trading platform all day.
It tends to be a lot safer, and provide better results in the long run.
Mostly this is because there is much more time to make a trading decision before risking assets on the forex market, so there is a better opportunity to collect more information about what’s going on.
Trend FX traders usually make a few trades a month, looking to capitalize on long-term moves in the forex markets. These days to months-long market shifts tend to be much more stable, and less likely to be interrupted by small news events.
So, having a good understanding of technical forex trading is valuable for every trend trader.
The Market is Technical
Many of the techniques developed for trend trading come from trading in commodities. This is because they tend to… well, trend.
This is why there is an appeal for commodity-based currencies among trend traders, such as the CAD, NZD, and AUD.
Many of the characteristics of trading commodities also apply to the forex markets, particularly one that is especially relevant to technical trading: the law of supply and demand.
Prices fluctuate based on the demand for and supply of a certain asset. Commodities trend because there is typically an offset between supply and demand. Currencies are similar, but the supply comes from central banks, usually in response to economic conditions.
Expectations surrounding supply and demand, therefore, push the price up and down in sweeping cycles.
Identifying the Key Spots
A currency pair will trend higher when there is more demand. And it’ll trend downward when there is more supply.
At any given moment, there is a certain number of forex traders who want to sell, and a certain number who want to buy.
If all the sellers manage to sell, then only buyers are left, and the currency will trend higher until the market becomes attractive for more people to sell. As the pair rises, more FX traders have made a profit with their trade, and want to exit.
Therefore, we want to be looking for instances when there is a disconnect between supply and demand, that show the start or end of a trend.
How the forex market behaves; the number of trades, the speed at which it moves, price fluctuations… These all give us insight into the balance between supply and demand.
There are a host of technical indicators that are specifically designed to extract information on supply and demand from the market, and help you develop your forex trading strategy.
The most basic FX indicator when trend trading is a simple moving average. By averaging out the last trades over a period of time, it’s easier to cut out the noise in the market and identify the trend.
The most common indicator for trend trading is Fibonacci regression. It’s based on a mathematical progression that a lot of people believe is found in the market. And because enough people believe in it, it actually comes true. This helps find support and resistance levels where a lot of forex traders have put their take profit and stop-loss orders, which would set off a new trend.
Other indicators that are useful with trend trading include MACD and RSI. There are other articles that discuss how to get the most of those indicators when trend trading.
The Best Kind of Correct
Technically, you can trade on technicals alone. But the advantage of trend trading is having the time and opportunity to get the most information about the market as possible before trading.
Fundamentals underly currency movements and help drive technical aspects. But the best trading is done with as broad an understanding of the forex market as possible.