TECHNICAL ANALYSIS

Trend Trading Made Simple

A very simple strategy based on the definition of the trend

Here’s a short story that you will find very familiar. Around 7 years ago when I first had the chance to learn something about Forex Trading, the first lesson I got to learn was: Trend is your friend! Which means that it is best to trade in the same direction of the main trend. Have you ever heard about it?

This first lesson was actually the milestone of everything that followed. Everybody was saying that the best strategy, to become profitable, is to trade with the trend. So I started learning about ways how to enter a trade in the direction of the main trend. I learnt about Price Patterns, Candlestick Patterns, Harmonic Patterns, Fibonacci, Technical Indicators, Pitch Fork, Gann, Elliott Waves and many other things that I found on the internet and books.

After a while I found out that there is a good and a bad thing about this lesson. The good thing is that it is very easy to do it, the bad thing nobody tells you how!

There are tens or maybe hundreds of ways that could help entering a trade in the direction of the main trend. Combinations of the theories I mentioned earlier, complex strategies and mathematical probabilities which could help you enter a trade in the direction of the trend, but I will show you a very simple strategy, based on the definition of the trend.

The father of modern technical analysis, Charles H. Dow, said in his studies that the market is moving in trends and that there are two main directions: up and down. The sideways moves were lines which were part of a rising or descending trend.

What is an uptrend? The simplest way to identify an uptrend is by looking for Higher Lows and Higher Highs. Once a higher low was drawn, followed by a higher high, we can presume that an uptrend has just started.

What is a down trend? A down trend can be defined as a succession of Lower Lows and Lower Highs. When a lower low followed by a lower high are drawn, we can presume that a down trend has just started.

In the image below (chart 1), you will observe how a down trend is changed to an uptrend and vice versa on the EURUSD, 60 minute chart. The best thing about this method is that it can be applicable to any instrument and any time frame.

Chart 1.

Because we now have an idea about what a trend is, let me tell you which is the core idea of this trend following strategy.

Trend Trading Step by Step

Step 1. Keep an eye on the current trend, until a reversal pattern emerges. Like shown in the picture below (chart 2).

Chart 2.

Step 2. Draw a trend line on the first correction of the new trend. Breaking and closing above this trend line can be considered a trading signal (Buy on rising trends and Sell on falling trends). You can choose to wait for the candle to close above/below the trend line and enter the trade, or trade at the breakout. I would recommend to wait for the close, because false breakouts may occur and diminish the probability of entering a profitable trade.

Chart 3.

Next>>