How to find, enter and exit a trend

Trading trends is one of the most popular ways to trade the forex market among both novice and expert traders. The popularity of the method rests partly upon the clarity which trends provide on the general direction of the market, and partly upon the high profit potential of entering and exiting trends at the appropriate times. Today we’ll look at the three crucial steps every trader must take in order to trade trends successfully.

1. Recognizing Trends

Before you start trading trends, you first have to learn to recognize them. Although there are sideway trends that can also be of interest to traders, when we talk about trend trading and a trending market, we’re primarily referring to uptrends and downtrends. When the market is trending, it’s not simply moving up or down, but does so in a systematic way. And in order to understand if the market is trending, we need to look at two elements on a chart: the high points of the moving price and the low points.

A price moving in an upward trend climbs to higher highs each time it rises, and falls to higher lows with every reversal.

Conversely, a price moving in a downward trend hits lower lows every time it falls and rises to lower highs when it reverses back up.

The best way to recognize a trending market then, is to look for the characteristic step-like pattern noted above, either going up or down.

2. Finding Entry Points

There are many ways to determine when to enter a trending market, but one of the most popular ones is the use of breakouts and breakdowns. A breakout is the point at which the price of the chart moves higher than its previous highest position (level of resistance), and a breakdown when it falls below its lowest low (level of support).

Once an uptrend has been recognized by its observing the formation of its first few peaks, a trader who sees the price moving upwards again can set an entry level for his trade at the level just above the previous peak, or in other words at the new breakout point of the price. That way if the trend does indeed continue its upward trend the trader will automatically be entered into the trade. And if the price unexpectedly reverses itself without breaking out into new highs, the trader will have protected him or herself from a false trend. The same rule applies for setting entry points on downtrends, except that the trader should now locate the breakdown point just below the chart’s preceding low and wait to see if the price does indeed dip below that level.

3. Determining Exit Points

Like all good things, trends must come to an end. And when they do, it’s time to exit the market before you risk losing your trade. How can you identify a profitable exit point? By reversing the strategy we used for identifying entry points.

When trading an uptrend, traders should set a stop-loss limit just below the last low of the chart. If the price breaks down below that level, it means that the uptrend has been broken and the market can move in unpredictable ways. When trading a downtrend, a stop-loss limit should be set just above the previous high on the chart. If the price climbs up higher than its preceding peak, the downtrend has come to an end and it’s time to exit the trade.

Traders should keep in mind that trading the currency markets always involves a certain amount of risk. Trading trends, however, can help you control your trading and limit your risk by helping identify profitable entry and exit points within the regular pattern of the trend.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.