Why Trend Trading Forms The Basis Of Many Forex Systems
Trading in the direction of the dominant market trend is often said to be one of the most profitable ways in which to profit from Forex trading. But why is this and is there any truth in this age old axiom?
When you look closely at many of the Forex systems on the market you will find, at their heart, some form of trend based strategy. A trend is simply just another way of describing market direction and therefore logic dictates that in order to profit from currency trading then you are going to need to identify the direction in which it is going to move. Currency markets can be likened to a cruise liner in that it can take a long time for them to turn around. Therefore the theory of following trend based strategies is that it is more likely that a trend will continue than fundamentally change.
This is true to an extent. However the basis of this theory rests on the timeframe over which the trend is measured. It is common to make use of a moving average indicator in order to determine the trend with many Forex strategies. These can be configured to display the rate of price movement over a predetermined number of days. If short time durations are used, then the rate of change in the market will be displayed over a shorter timeframe. This will show a greater amount of fluctuation in the markets than if the time duration is raised.
Using a greater number of days in your moving average to find longer term trends provides a much more accurate method of trading trends. The rate of change in price will be much slower making it easier to identify strong trends to trade. Many Forex trading systems will seek confirmation of a dominant trend as a precursor to further market analysis. By trading with this approach it is possible to de-risk the strategy and give the backing of the market to any trade opportunities taken.
