Technical Analysis – Trend Following Your Way to Big Profits

If you look at any chart of currencies you will see that they move in trends. These are of course easy to spot in hindsight. Timing your entry levels and following these trends is of course harder and the aim of all currency traders, however 95% fail and lose their money.

If you are using or want to use technical analysis you must know the basics of trend following and here are some tips to help you make profits.

Let’s look at 3 types of trend and then look at some tips for trading them:

1. Long term Trends

As currencies reflect the underlying health of the economy and the economic cycle there are currency trends that last months or even years and this is the primary trend.

2. Intermediate Trends

These last from anywhere between a few weeks and months and are reactions within the larger primary trend.

3. Short term Trends

These last for a few days to around a couple of weeks.

All the above can be traded for profit and the trends you want to trend are down to personal trading style and taste.

Trends not to trade

Many of you will have wondered why we ignored daily and intra day trends.

The answer is they simply cannot be traded.

While you can see them in hindsight, the data in a day is unreliable, as all daily and intra day volatility is random.

If the data cannot be used to get the odds in your favor you will lose when trend following, with any form of technical analysis.

Trend following in very short periods is a mugs game and that’s why you never see a day trader with a track record of profits.

So how do you catch the trends and enter with the best risk reward?

Well this is the challenge for all FOREX traders and as we have said it is more difficult than most people think – that’s why 95% of traders lose.

Here we will give you some tips when currency trading for catching currency trends and turning them into profits:

1. Understand the concept of support and resistance and trade breakouts.

It’s a fact that most major market moves start from new market highs NOT market lows, so if you use breakouts you will catch the really big moves.

2. When Buying Support or Selling resistance DON’T Predict

This is a major error made by novice traders. Then buy into support and “hope” it will hold.

When you are trend following this is a good way to lose. You are predicting where as you should be acting on confirmation.

Always wait for a test of support and use a momentum indicator to indicate a change in direction in your favor BEFORE entering the trade.

This will confirm support or resistance has held and the momentum has reversed you then have the odds in your favor

3. The differences between Long and short term trend Following

The concepts are generally the same, but there is one difference in my view between following long and intermediate trends and short term ones.

With long term and intermediate trends you can trail stops in short term trading you must use a target.

Because the profits are smaller and moves shorter in the latter, they can disappear quickly, so you should “hit and run” and bank profits on the hitting of your set target.

When doing the above we always set the target lower than the consensus.

If prices are generally targeting a level and the market is looking for it we would bank early.

4. Patience

Trend following involves being patient and staying on the sidelines until you see an opportunity that fits your methodology.

Don’t be in a hurry to trade – Only trade when the odds are in your favour.

Catching trends and making profits from them is hard, but with the right approach and only trading when the odds are in your favour you can pile up some big gains

Good Luck

Source by Sacha Tarkovsky