Forex trends

What is trend trading?  What does that mean, why do some experts think that it the only trading strategy? Here we are going to find out whether it is the only way to trade — trade with the trend. We will discuss the term «Forex trend» in details, find out how to trade with trend, and try to understand whether it is possible to get profit if trade countertrend.

What is a trend — direction or situation?

If we think about how to determine trend direction, it is considered that the trend is the direction in which the price moves during a certain time period. Not only novice traders in the Forex market think so, but also experienced traders who work at the stock exchange. By the way, many articles and books on trading confirm it. Many authors confidently exploit the idea of following the trend. For example, Michael Covel in his book «Trend following trading systems» provide a lot of examples to determine the trend. There are various Forex indicators, Experts Advisers, trend forex systems, trend reversal patterns for determining the direction of price movement and the strength of the trend. However, there is an opinion that the concept of «trend» which is related to changes in quotations on the chart, is better to perceive as a certain type of market situation. For example, if it is a vertical trend, then there are three stages:

•     Accumulation (large participants accumulate positions to buy);
•     Growth (during this period, the price of an asset is growing);
•     Distribution (investors sell their positions).

Risks of the trend trading

If we are talking about a directed (vertical) trend, many traders take into consideration only the second stage as during the first and the last stage the price usually moves in the flat. When planning transactions and connect them all only to a specific direction, such approach can play a Old Harry at any moment with the trader. When the direction of price movement is already obvious, it is the second stage which will end soon — it means that now it is too late to buy. It is more reasonable to enter the market at the accumulation stage.

But every trader sees the Forex trend and only on this basis buy, although big participants prepare to sell the positions. By the way, large participants who have the resources and technical capabilities to manipulate the «market mass» (private investors, who are in the majority in the market), are aware of the desire of private traders to «follow the trend».

Trend types: there are much more trend typer than it is commonly believed

How to determine the trend in Forex? Let’s talk about trend in the conventional sense (as a directed price movement). Visually, there are several trend types: an upward (bullish) trend, a downward (bearish) trend and a flat — when a financial instrument is traded in a formed price channel. To find the end of a directed trend in Forex, trend reversal patterns and trend lines are used to indicate the borders of the flat. Flat also has its own types — borders of the price channel can change upwards or downwards. However, such movements can not be characterized as bullish or bearish. Changes are very slight (in relation to the previous peak). During the price movement in the flat channel funds are redistributed. Large participants accumulate positions to buy or sell before the further strong upward or downward movement. Actually, it is not always possible determine their intentions correctly. If you have certain resources, it is quiet easy to persuade the «market mass» to some necessary decisions (false breakdowns, sharp price changes, creation of powerful impenetrable levels). Private traders always can sell or buy from them some amount of assets. However, some of the big participants also may choose the wrong direction, but they make mistakes much less than private investors do. Significant trend movements can be triggered by market manipulation (false breakdowns of levels or its support) or objective economic conditions. Actually, institutional traders (such as banks, funds, corporations) have more serious resources for collecting and analyzing information, more effective trading software (well, not all traders prefer to download and trade only through the MT4 platform (5)), use progressive strategies of money management, hedging methods. All these measures allow significantly diminish risks.

The main problem to determine the trend

Downward or upward Forex trend can not always be correctly identified even with the help of particular indicators or Expert Adviser. It is not easy to determine Forex trend. The problem is that trend is trend only in connection with the timeframe. For example, on the M15 timeframe we can see a directed trend, but on the H1 chart it is only part of the flat which lasts several days. Moreover, on the D1 chart this flat is only a small correction that occurred after a long downward «trend» which lasted several months. It is completely unclear whether it will continue or reverse after the rebound. But here traders who prefer to consider the trend as direction (for example, adding trend lines on the chart) find a way out — they are tied up to the timeframe (in accordance with the timeframe, adjust the trend strength indicators for Forex instruments). It means that if the movement is visually determined on the timeframe within which it works, then there is a trend, and it is necessary to follow it. In fact, Forex trend can be effective within the next hour or day and it is relevant for any of the timeframes. So trend trading as a strategy becomes meaningless. Actually, what kind of a trend are we talking about? After all, if it is supposed that trend trade and the trend is observed on one of the timeframes, the trader automatically trades against trends on other timeframes …

What to do: trade with the trend or countertrend?

Trend trading is just a race ahead. In case if a trader can sell positions before the distribution stage — the trader gains profit. If he entered the market (of course, with trend) right when the big participants have already started selling their positions (actually, it is very difficult to determine it), the loss is fixed. In this situation, it may seem that it is more reasonable to trade countertrend. It means to buy when others sell, and vice versa. However, such approach the same to a strategy — trading in the existing trend, can not make trade more profitable if we evaluate trend movements of any direction. Really great profit can be gained from the directed movement. But it is vital to predict trend correctly and it can be done only in half of the cases (Expert Advisers or particular Forex trend indicators not always generate true signals).

Trade in trend or prepare for the trend?

Although, the idea of following the trend is very popular, many traders use strategies (and Expert Advisers) to trade in flat as there is some price stability in the flat. As large participants accumulate positions before the start of the trend movement, price at least several times will be at the borders of the price range before it leaves the range. Thus, it is enough to «sell at the top and buy at the bottom», just limit losses by Stop Loss orders. Place SL at a such distance from the border so that it won’t be executed by a false breakdown. However, it is not forbidden to catch the trend, even without having any idea in what direction it can develop, its the strength, and where the trend will reverse. When you trade in the flat, you can open main and additional positions to buy at the lower border of the channel. The main position closes at the upper border with a profit, and the additional one is hold until the order is in the «loss free zone» if the price remains in the channel or close with a good profit if the vertical trend is developed. The same strategy can be used for sell orders at the upper border of the channel. You can download and use any algorithmic system (Expert Adviser), based on a similar algorithm, on the demo account to understand how the strategy works on different tools. As an alternative, you can choose trend trading strategy with countertrend orders. Open a position in the opposite direction and fix the loss, then wait for the price to turn back into a channel after a false breakdown. And if you didn’t determine the strength of the trend and the direction correctly (for example, the trend reversal indicators did not work) — such approach can reduce the loss to a minimum.

Conclusion

Following the trend, opening positions on the rebounds is a very common logic that really brings profit, but only in half of the trades. Directed price movement is not often stable and it is rare enough to distinguish a correction or a rebound from a trend reversal. If we consider a trend as a process involving different stages, we can be ready for a directed movement and already have an opened position before the main movement has already begun.