A Short-Cut To Trend Trading

[ForexArticles]

Trend trading combines many benefits of the FX market while also helping traders who can not or decide not to make a full-time job out of trading. First, the FX Market is given to strong and long-term trends due to monetary policy divergences that take a long time to develop and like turning an aircraft carrier on the ocean, a very long time to turn. Second, trend trading is easily the most cost-effective way to trade the FX market.

Every time you enter a trade, regardless of the length of time you hold the trade, you pay a spread between the bid/ask. Therefore, a trader who enters 20 trades a week pays the broker 20 times to enter a trade whereas a swing trader who enters 1-3 trades a week only pays the spread 1-3 times. The reason why short-term traders often choose their approach is that they believe, and sometimes rightfully so, that they have the ability to time the market and get more out of the market than just hanging onto a strong trend.

Finding the Trends to Trade

This trend trading series has been put together to help you develop a full trading approach build around trends. Many FX traders look through different charts to find a good trend to trade, spot a decent entry point, and then enter the trade in the direction of the larger trend until they find a profit target that includes a good risk: reward or exit when the trend appears to have ended. However, there is a simple approach that may help you skip to the front of the line to finding a strong trend.

Strong Weak Approach to Trend Trading

Not all trends are created equal. While many charts may show a trend, some are easier to trade and offer more upside than others. The trends that offer the best moves are those where the strongest currency is traded against the weakest currency.

In a word, using the Strong Weak approach allows you to trade with an edge. This edge is built around buying the strongest currency while selling the weakest currency. If you're wondering what is needed to find the strongest and weakest currency, you can use a simple tool like a moving average.

Finding the Strongest & Weakest Currency

As an example, a current strong weak pairing is GBPUSD. Currently, GBPUSD is in a downtrend on the Daily chart and has been since Summer 2014. Based on a moving average strong/weak analysis, you can see that the GBP is weak and the USD is strong. Taking advantage of this approach would have a trend trader selling that pair in the direction of the Daily downtrend for a higher probability trade

Here is a simple way to run your own strong / weak analysis. One a longer term chart or swing chart like a a 4 hour chart or Daily chart, you can apply a 200 MVA, 100 MVA, or 50 MVA but generally the longer-term, the better. On an excel sheet, you can list major individual currencies in a vertical column like EUR, USD, CHF, JPY, GBP, AUD, NZD, CAD.

From here, make note of which currencies are above the respective moving averages against other currency pairs. Therefore, on the EUR, you make note on EURUSD, EURGBP, EURJPY, EURCAD, EURAUD, EURNZD, EURCHF and whether it is above or below the moving average. If every currency pair leading with the EUR is above the moving average then the EUR is very strong as it's beating every other major currency. If every currency pair leading with the EUR is below the moving average, then the EUR is very weak as it's losing to every other major currency.

You can run this weekly across the board. The goal here is to find the strongest currency that is above the moving average the most across the board and buy that currency against the weakest currency. The weakest currency would be sold in looking for the trend to continue knowing that trends are long lasting and take a long-term to reverse.

Summary

Whether you're looking for any good trend to trade or looking for the best trend to trade, trading with the trend is a favorable approach that shouldn't be overlooked. Feel free to come back to this series again and again until you become more and more comfortable with trend trading.