Forex Trend Strategy - trade on trend signals

What is trend trading? How to determine the direction of the trend? What are the trend indicators? What is the danger of trading against the trend? The best Forex trending strategy.

Welcome you friends! Do you want to learn how to make money on Forex? This is very easy, you only need to have a trending strategy and follow the trend. Trend trading is a classic of all Forex strategies, but for some reason many traders try to catch a trend reversal and trade against him, although the risk of such transactions is much higher than the trending strategy. They explain this by the fact that the current trend is already at the top or bottom, and they want to be at the beginning of a new trend. But they do not understand that the current trend can last for years, and accept the correction of the trend for its reversal, losing their money. If you want to learn how to identify trend trading signals and have a profitable trend trading strategy, then you are on the right track. In this guide, you will learn what trend trading is, how to identify a trend in real time and successfully follow it, what are the trend indicators, and how to create your own Forex trending strategy.

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What is trend trading?

Trend trading is a methodology whose purpose is to make a profit by examining the momentum of a tool in a certain direction. When the prevailing price movement shows a certain direction, up or down, this is called a trend.

How to determine the trend?

The standard definition of a trend, according to Dow's theory, is a series of higher highs, followed by a series of higher lows that determine an uptrend. Conversely, a series of lower lows followed by a series of lower highs determines a downtrend.

This means that the trend never moves in a straight line. But the trend takes the form of a zigzag movement. Traders have a saying: "The trend is your friend!" We do not believe that trade should be more complicated than it is.

So, here are the basic rules for determining the direction of a trend with the naked eye:

  • If you see on the chart that the price is rising from the lower left corner to the upper right corner, this is an upward or bullish trend.
  • If you see a price falling from the upper left corner to the lower right corner on the chart, this is a downtrend or a bearish trend.
  • If you see on the chart that the price is moving up and down everywhere, the market is in consolidation, and there is no trend at the moment.

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Why is this so important?

If you want to successfully trade Forex, you must have the skills to determine the trend. It doesn't matter if you are a scalper or a day trader. Regardless of your preferred time period, you need a trend if you want to make a profit. The scale of the trend is not a big deal. However, the longer the time frame, the stronger the trend.

Trend trading gives you the advantage of eliminating some of the disadvantages that all trading strategies have. There are no strategies with a win rate of 100% - this is a myth. But you can reduce the percentage of losing trades and increase the size of profitable trades.

Thus, while you are trading in the direction of the trend, even if you are mistaken in choosing the time to enter the trade, the forces that control the trend will ultimately work in your favor and eliminate some of the risk. Everything will fall into place when you trade with the trend. And identifying strong trends can lead to potentially greater returns. Pay attention to the picture below, where you can see how much you could earn by trading with and against the trend. In our opinion, the winner is obvious.

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What are Forex trend indicators?

Trend indicators are technical analysis tools necessary to determine the general direction of the market. These technical indicators can help you filter and confirm trend buy and sell signals. Trend indicators are good for eliminating market noise and give us a better idea of market trends.

There is an old trend filter used by legendary hedge fund managers. Professional traders and hedge fund managers use the 200-day moving average to determine the direction of the trend.

One of the greatest traders and billionaire Paul Tudor Jones, determines the direction of the trend using a moving average of 200 days. If the price is above the 200-day EMA, we are in an uptrend. Conversely, if the price is below the 200-day EMA, we are in a downtrend.

However, determining the direction of the trend is not all; you also need to know the strength of the trend before entering a trade. The Aroon indicator from the oscillator family will help you with this. But unlike traditional oscillators that use sine waves, the Aroon indicator lines are triangular. This gives you an advantage in the ease of detecting trading signals.

The Aroon indicator consists of two lines that range between 0 and 100:

  • Aroon Up (red) measures the strength of a bull trend;
  • Aroon Down (blue) measures the strength of a bearish trend.

When the Aroon Up line is close to level 100 and the Aroon Down line is close to level 0, the market is in a strong bullish trend.

And vice versa, when the Aroon Down line is close to level 100 and the Aroon Up line is close to level 0, the market is in a strong bearish trend.

Buy and sell signals for the Aroon indicator are simple. The main buy signal will take place when Aroon Up moves up. As Aroon Up rises in the direction of level 100, the chart will also show that the price is in the bullish direction. This is because our chart now forms higher highs. We get more bullish candles, as the Aroon line represents.

In addition to the Aroon Up moving up, the Aroon Down line should move down to confirm a bullish trend. As soon as Aroon Up crosses Aroon Down, a buy signal is generated.

You can download the Aroon indicator for free at the end of the article. See also how to set indicators in MT4.

The best Forex trending strategy - EMA 200 + Aroon indicator

The idea of this trend trading strategy is based on the search for impulse price movements in the direction of the trend. To do this, we will use two indicators - EMA with a period of 200 and the Aroon oscillator.

To eliminate any element of subjectivity, simply add a 200-day moving average EMA to the chart.

It all comes down to how the price is positioned relative to the 200-day moving average:

  • If the price is above the 200-day moving average, then we are in an uptrend;
  • If the price is below the 200-day moving average, then we are in a downtrend.

To evaluate the strength of the trend, we will use another tool - Aroon Oscillator. When Aroon Up crosses Aroon Down, a buy signal is generated.

When the Aroon Up line is close to level 100 and the Aroon Down line is close to level 0, the market is in a strong bullish trend.

A trend trading strategy cannot do without stop loss and take profit. You have several options for setting a stop loss: for the last minimum / maximum or below the moving average. It is necessary to choose the best ratio of risk to profit. For example, if the price is too far from the 200-day moving average, it makes no sense to place your stop loss above / below the moving average.

You need to take profits when Aroon Up crosses Aroon Down again, but from top to bottom.

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Counter-Forex Trading Strategy

We already wrote above that trading against the trend is dangerous, especially for novice traders. But if you like to take risks, then see our recommendations to minimize the percentage of risk.

Open a counter-trend trade only if the following conditions are met:

  1. A reversal pattern appeared on the chart (for example, a pin bar or another pattern from the trading system Price Action).
  2. You have received confirmation of a trend reversal indicator (for example, Stochastic Oscillator).

Remember that a reversal signal always generates fewer points than in trend transactions, so take profits as soon as possible.

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With the right money management, all trend trading strategies can relatively quickly increase your Forex account . The real secret to successful trend trading is not to close the trade too early. Make sure you trade with a risk to reward ratio of at least 1: 3. Long-term trends can last from a couple of months to several years. But most traders are focused on the short term. In this case, we are looking for Forex trends that can last from 3 weeks to 3 months. Experienced traders can make money by trading against the trend, but the risks of such transactions are much higher. Profitable deals for you!

Free download of the indicator Aroon Oscillator

See also the article "Trading Strategy by Support and Resistance Levels".