The forex market is the largest and most active financial market in the world. With 24-hour trading available all over the globe via your trading platform of choice, it offers near-constant opportunities to profit as currencies rise and fall against each other. Trend trading is one key approach that allows you to plot and capitalise on them as they arise.
In short, this trading style involves monitoring an asset’s momentum when moving in a certain direction, be that up, down or sideways. A primary trend describes its overarching movement over time, while secondary trends are shorter-term fluctuations. As a trend trader, you’ll generally focus on the former.
There are several trading strategies which dictate how you’ll actually trade these trends, but here are four of the most popular:
The breakout trading strategy involves first identifying known levels of ‘support and resistance’ – points where your chosen currency has previously reversed in a trend. You’ll then analyse the market’s current momentum to judge whether it’s likely to ‘break out’ of this range and create a new ongoing trend.
You could place an entry order above resistance or below support levels to capture significant price movements should they occur. It’s a popular option in strong trending markets.
Support and Resistance Trading
Also known as range trading, this strategy is more suited to a forex market with a weak trend that consistently sticks within identified support and resistance levels.
You may open a position near the known support level, then close it at the other end of the range when it’s unlikely to rise higher. Your success will depend on whether the market continues to trade within this range.
Retracement trading is popular for trends somewhere in the middle of strong and weak, displaying periods of momentum and pullback alike. A temporary reverse in direction, known as a retracement, can make a profitable entry point – assuming it does turn out to be temporary and not a full trend reversal.
Distinguishing between a temporary retreat and a genuine reversal is key here.
News trading is a different strategy that focuses on fundamental factors affecting sentiment in a forex market, such as economic performance, central bank policies and political news.
For example, if the Bank of England reports increasing inflation over several months, the British pound is likely to fall in value relative to currencies from countries with lower inflation. As a trader, you may monitor their public releases to react accordingly.
Each of these approaches have pros and cons in different market conditions. Successful forex traders may use a combination at any one time to help them make trade decisions with greater confidence than if relying on one alone.