From the September 01, 2012 issue of Futures Magazine • Subscribe!

Trading forex with the trend

Trends are great profit-making opportunities. They are directional, but usually include ranges that provide you a chance to hop on board at numerous stages.

If forex traders have the potential to make the most money trading with the trend, the opposite is true. That is, traders have the potential to lose the most money, and lose it fast, trading against the trend. As a result, it makes sense to trade with the trend.

Even though trends are directional, they tend to move in a step-like progression. Large trend moves are followed by smaller corrections within the trend. For retail forex traders in a position, those corrections can be both painful and confusing. Corrections can increase uncertainty; uncertainty increases anxiety; anxiety increases fear; fear is a trader’s worst enemy. It is hard to trade well with heightened fear.

During the corrections, many retail forex traders get themselves turned around. Instead of waiting the corrections out and buying a dip on an uptrend, or selling a rally on a downtrend, the temptation is to sell a corrective low or buy a corrective high. In doing so, traders can get out of sync with the trend and find themselves in a cycle of repeatedly trading against the trend.

Fibonacci retracements are a technical tool that can give traders a much-needed framework for trading forex trends. They specifically can help traders stay on the trend when the trend is strong, and exit the trend if the clues suggest the trend is over. 

Makings of a trend

A trending market occurs when there is an imbalance. The imbalance is caused when the buyers are overwhelming the sellers in an uptrend, or the sellers are overwhelming the buyers in a downtrend. Typically, the imbalance originates from the forex market’s largest and most capitalized traders. They have the firepower to introduce imbalance to an otherwise balanced market.

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