What is a trend?

A trend is simply the direction of movement of the currency pair. No matter the direction of movement, currencies never move in a straight line. They move in a succession of crests and troughs, like the waves of an ocean, but they ultimately end up defining a particular direction for the currency pair.

The trend trading strategies are simply techniques for profiting from trend movements in forex. Currency pairs always move in a trend. The trend could be upwards, downwards or sideways.

• Upward Trend: A currency pair is said to be in an upward trend when the price action forms successively higher highs and higher lows. Within these highs and lows lie the peaks and troughs that define the price movements.
• Downward trend: A downward trend is marked by the price action of a currency pair forming successively lower highs and lower lows. Within these highs and lows are found the successive peaks and troughs which form the price action of the currency pair.
• Side trend is formed when the highs and lows of the price action are in a horizontal plane, without being higher or lower. In this case, the currency pair is said to be in range-bound mode or in consolidation.

In order to properly delineate the trend, traders make use of trend lines, and these trend lines showcase the areas of support (price lows) and resistance (price highs). The most effective trend trading strategy is being able to trade off the support and resistance areas. The line tool on the forex platforms is used to draw trend lines across the price highs or price lows. Effective trading of the trend requires the ability to draw correct trend lines. But what are the best practices in drawing trend lines?

Trend Lines: Best Practices for Plotting and Usage

There are best practices which must be adhered to when plotting trend lines for usage in trend trading.

• The best time frames to use in judging the trend are the 4-hour and daily time frames. These time frames reflect the activity of traders in determining price over weeks and sometimes months, which is long enough to know the true trend. The 15-minute and 1-hour time frames are not good indications of a trend as they only show price activity within hours or just a day.
• In an uptrend, the trend line is oriented upwards and to the right, and must be able to touch at least three price lows. Usually the trend line should cut across two initial price lows and extend into the future, and the third price low should be a test of the trend line. A test in this regard indicates a situation where the price action bounces on the trend line without breaking it, thus forming a third price low which validates the trend.
• In a downtrend, the same principles are applied but in reverse. The trend is oriented downwards and to the right, and must touch at least three price highs. Usually the trend line touches two price highs and extend into the future, awaiting the price action to come to it once more to test the trend line a third time. If there is no breakout to the upside and price retreats back down on making contact with the trend line, then this validates the downtrend.

In terms of angulation, the best trend lines are those which have a 45 degree orientation. Trend lines which are too steep (> 60 degrees to the horizontal) indicate rapid fire movements which are unsustainable and will soon peter out. If the trend lines are too flat (<35 degrees to the horizontal), then it means that the trend is not strong enough and will probably collapse into a market consolidation.

Trading the Trend

There are two ways to trade the trend:

1. Trading a continuation
2. Trading a reversal

The trend continuation trade simply aims to trade along the trend line in the direction of the trend. In essence, this is a trend line bounce trade where the trader attempts to do the following:

a) In an uptrend, the trader attempts to trade off a trend line bounce. The trend line bounce to the upside is created because there is a preponderance of buy orders at the trend line. It is this tilt in the balance of the market created by buy orders that causes prices to start rising from the trend line. If the majority of traders in institutional setups (where massive volumes are traded) are all buying at the trend line, you should do the same too, using technically sound entry parameters.

b) In a downtrend, the aim is to sell when the price action meets the resistance, formed by the price highs and demarcated by the down trend line. The price reverses at the trend line because there are more sellers than buyers at that area. The short entry must be made with sound technical entries.

In these two cases, it can be clearly seen that the price action tested the trend lines twice, and then a third time for confirmation. The entries were made at the 4^th time of asking, and the price action produced the desired result. One thing that is obvious here is that it takes a lot of patience to allow the price action to do the required bounces on the trend line, before the trades are made.

Trend Reversal

The other way to trade the trend is when the trend comes to an end. This is the trend reversal. A trend reversal occurs when the trend line that was previously drawn using the parameters described above is broken. When the break occurs, the price action will try to go back to where it came from. At this time, the trend line undergoes a role reversal to prevent this from occurring.

The reversal of the trend is seen here when the candle in view breaks the upward trend line. We see the price action trying to go back upwards, but this is rejected by this trend line now acting as a resistance. This provided the impetus for the downward move of price action, marking a full trend reversal.