The market can only do two things. Go up, or go down.
Financial markets can be a scary thing to work in for beginners. They see wild changes and risk where they should spot opportunity. This article will help you understand the forex market a bit better.
This is not a full proof strategy, trading equities is inherently risky. But with proper risk management trading can become very lucrative quickly.
The first lesson we are going over today is spotting and trading in trends. Trading in trends means we are trading on the side of the current market trend. The basic rules apply buy low sell high. But this strategy will give you strong levels which you can enter trades to maximize profits.
How Can I spot trends in market charts?
Trends are super easy to spot on charts. Personally I will select a range of 1 hour to 1 day. Look back into the chart and find where exactly the price is moving. Has the price been climbing all day? Has the trend been on the down all day?
These are key information in formulating which way we want to get into our trade. Will we be buying along with the market, or selling. Not knowing which way the market is moving will cause you to loss money.
Above is a market chart for EUR/USD. Here you can see it’s a daily chart, and I’ve circled a few key areas that we will focus on later. Which direction would you say this market is trending in?
If you said down you’d be correct. Now these are not long term trading strategies, you will be moving into and out of positions at target points, more on that later. Lets get back to spotting a trend. The points I’ve circled are called Lower Highs and Lower Lows. When a trend keeps hitting lower highs and lower lows you can expect it to continue until the pattern is broken. (Same low or new high) Now that we spotted a nice down trend how can we trade in the market to make some money?
How Can I Trade in Market Trends?
Trading in trends is super easy, you spot a trend and wait for confirmation then move in the direction the market is already moving. I have the same pair EUR/USD but moved into a 15 minute chart to show the ease of movement and the speed at which you can execute some of these trades. For this example we are using a down trend, but an uptrend you would just reverse the strategy and buy instead of sell.
From the example above the two blue circles are the first indicator we have. It’s called a double top or same high depending on who you’re talking to. A double top will usually mean a drop is on the way. Ten minutes after the high was hit the drop occurred. We see a pull back into a lower high which would be our first indicator that the trend is going to continue downward. So we jump in with a sell, our main target is the last low. As the price is on a downtrend we have a very nice statistical chance that the target will be met again. The green dotted line would be our take profit point.
The cool thing about trading into trends is that you could realistically enter the same position in another pull back ( Green circle ) and continue trading in the trend. Remember once the pattern is broken the trend most likely will stop.
How Can I make more money trading in the Market?
First you’ll need to have your risk management set up right. If you are risking 1:1, for every dollar you make you can lose the same amount, you will find your equity curve is on a downward trend.
I would suggest a risk to reward of 1:2 for every dollar you risk you make two. Just because the trend strategy works a lot does not mean its full proof. Markets are just buyers and sellers and if they feel the price is to low or too high they will act accordingly, even if it’s off trend, or pattern.
You need to make a strategy that can eat some losers and still be profitable. Without proper risk management you will loss more than you win, even if you win more trades than you lose.