Strategy 2
Trend Riding
؟Who doesn’t like a trend
;Many traders live by the often-repeated “the trend is your friend until the end” rule
they are comforted with the knowledge that they are with the majority of the
market. Being able to ride on a trend is akin to making full use of the wind direction
to steer your ship towards your destination. For a ship to go against the wind
requires a tremendous amount of effort – one has to fight the stubborn resistance
from the opposing wind. Indeed, for most of the time, it pays more to be on the side
of the current trend than to go against it. In the forex market, trend riders can
capture any trend regardless of whether it is rising or falling in an attempt to
generate trading profits
Forex tends to have quite trending markets, regardless of which time frame you are
looking at – trends are often formed on hourly, daily or weekly charts. This is due
to the fact that currency price movements are very much influenced by the
underlying macroeconomic factors which in turn shape the market players’ views
of where currency prices should be heading. With trends possibly having a long
lifespan stretching to months, or even years, it is no wonder that many traders and
fund managers exalt the strategy of hitching onto trends, with the glorious aim of
capturing enormous profits from start to finish
Trend riding is one of my favourite trading approaches, and I often ride the uptrend
or downtrend after the trend has been established, rather than anticipating the move
before it happens. I would say that even though the trend is your friend most of the
times, one has to use a variety of methods to distinguish between a continuation of
the trend and a possible trend reversal. But before you can ride on trends, you first
need to identify what the current trend is, and to determine the time frame of
the trend
Time Frames of Trends
Sometimes, people ask me for my opinion on the current trend for certain currency
pairs, I reply with another question in return, “According to the past 5 mins, 5
hours, 5 days or 5 weeks?” Some traders are not aware that different trends exist in
different time frames. The question of what kind of trend is in place cannot be
separated from the time frame that a trend is in. Trends are, after all, used to
determine the relative direction of prices in a market over different time periods
:There are mainly three types of trends in terms of time measurement
(1primary (long-term
2intermediate (medium-term), and
. 3short-term
These are discussed in further detail below
1Primary trend
Aprimary trend lasts the longest period of time, and its lifespan may range between
eight months and two years. This is the major trend that can be spotted easily on
longer term charts such as the daily, weekly or monthly charts. Long-term traders
who trade according to the primary trend are the most concerned about the
fundamental picture of the currency pairs that they are trading, since fundamental
factors will provide these traders with an idea of supply and demand on a bigger
scale
2Intermediate trend
Within a primary trend, there will be counter-cyclical trends, and such price
movements form the intermediate trend. This type of trend could last from a month
to as long as eight months. Knowing what the intermediate trend is of great
importance to the position trader who tends to hold positions for several weeks or
months at one go
3Short-term trend
A short-term trend can last for a few days to as long as a month. It appears during
the course of the intermediate trend due to global capital flows reacting to daily
economic news and political situations. Day traders are concerned with spotting
and identifying short-term trends and as such short-term price movements are
aplenty in the currency market, and can provide significant profit opportunities
within a very short period of time
No matter which time frame you may trade, it is vital to monitor and identify the
primary trend, the intermediate trend, and the short-term trend for a better overall
picture of the trend