- A trend trading plan can be created in 3 simple steps
- Traders can find a trend and then look to trade a price breakout
- Managing market exits can be done using previously identified highs and lows
It can be extremely difficult for new traders to finalize a trend trading strategy for trading the Forex market. However, the good news is that most trend based strategies can be broken down into three different components. Today we are going to review the basics of a trending market strategy by identifying the trend, planning an entry, and identifying an exit.
Find the Trend
The first step to trend trading is to find the trend. There are many ways to identify the GBPUSD trend pictured below, but one of easiest is through identifying if price is creating higher highs or higher low. If price is stair stepping upwards that means price is making higher highs, and the trend is up. Conversely if price is stepping down toward lower lows this mean price is potentially declining in a downtrend.
Given the information above, traders should look for opportunities to buy the GBPUSD in its current uptrend. Pictured below we can see the chart graphically creating higher highs. If the trend continues, expectations are that price will remain support and new highs will continue to be created.
Plan an Entry
Once a trend is found, traders can choose from a variety of tactics to enter into the market. One of the easiest ways to enter into the market is through the use of a breakout. Since the definition of an uptrend is the creation of higher highs and higher lows, traders can plan to enter into the market when the trend continues and the GBPUSD breaks to a higher high.
Below you can see an entry to buy the GBPUSD with the trend. Traders using this methodology can set an entry above this value and in the event price breaks above this value they will be entered into the market. There are two benefits of using an entry order. First you don’t have to be in front of your computer to be entered into a position. As long as you have an entry and the price you have selected is available for trading, your order will be triggered. Secondly, in the event price never breaks above the previous high this order can also be deleted. Now that we have an entry planned let’s look at completing our trading idea.
When trading markets, there is always the potential to lose money. That’s why when trading trends, it is important to know that they will eventually come to an end. In an uptrend like the GBPUSD, traders may place stops under the previously identified swing low (higher low). In the event that price breaks under this value, it may symbolize that at least temporarily the GBPUSD trend may be ending. Traders can exit any positions at this point through the use of a Stop Order.
Knowing where to take profit is also an important part of any trend trading plan. Traders should look to avoid the “Traders Number One Mistake” by looking to make more in profits than what they risk in the event the trade moves against them. Using the example above, if a 150 pip stop loss has been set under the swing low, traders will expect more in return in the event that they are right. If a 300 pip limit has been set, this would create an expectation of a 1:2 Risk/Reward ratio.
Written by Walker England, Trading Instructor
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