FX traders are always looking to improve their edge, and one question I’m often asked is how trend following trading strategies might help. And while most of my wealth is in the stock market, I do maintain a forex trading account where I also apply trend following strategies.
So in this short blog post, I’m going to share a little more insight into this proven approach to markets, and why you may consider trend following trading tactics for your own FX account! As you’ll see, there’s a lot of potential upside.
Why FX Traders Can Benefit From Trend Following:
In case you aren’t familiar, trend following trading strategies are all about identifying the direction of the market’s momentum. Then, trend followers align themselves with this path of least resistance and try to ride it higher or lower for as long as possible.
In short: trend followers buy what other people are buying! And while this might sound simplistic at first glance, there are a number of key benefits you might not be aware of. For example, trend following helps you align yourself with the major trend, it can work across various timeframes, and it gives you a clearly-defined way to manage risk. How can you argue with that?
But the value of trend following doesn’t stop there. In fact, there are plenty of reasons why FX traders, in particular, can benefit from this approach to trading. Let me show you what I mean…
Trend Following Helps Manage Risk:
Trend following trading strategies are designed to cut losses quickly and let winners run. More specifically, a good trend following system will always include a stop loss, usually based on the volatility of what you’re trading. And by always knowing what your stop loss is before you enter your trade, you can better avoid big losses piling up in your brokerage account.
The other great thing about the nature of trend following is that even with a 50% win rate, you can still be very profitable as a trader. That’s because on average, your winning trades will be much bigger than your losers. This positive expectancy really helps maximize your chances of long-term success.
Trend Followers Don’t Need To Predict:
In my experience writing about online trading (whether stocks, ETFs, currencies or CFDs), many new traders are focused on trying to predict where the market is going. But the great thing about trend following is, you don’t need to predict the direction of the market to make money. Seriously!
Now I know this might be hard to believe. But the basic approach to trend following is simply to buy a breakout and hold on for the ride. Then, as the trend moves in your favor you can trail your stop loss higher. This helps you lock in profits until you’re eventually stopped out when price inevitably reverses.
However, by simply letting price be your guide and cutting the losing trades quickly, you’ll find you can still get consistent results without having to make outlandish predictions. After all, it’s called trend following, not trend forecasting! So put away your crystal ball and instead just focus on properly trading your plan.
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Technical Trends Are Easy To Scan For:
Free online scanning tools make it a cinch to find trend following trade ideas. Since price trends are purely technical in nature, it’s easy to find new trade signals simply by looking for new highs and lows on your given trading timeframe. It really is that easy.
And since trend following is primarily technical in nature, it can quickly be applied to any asset class for which you can pull up a price chart. You don’t need to rely on esoteric indicators or fancy black box systems. Instead, you just buy the new high, set your stop loss, and try to hold on for the ride.
Of course, the technical trend following approach can also easily be paired with fundamental analysis too. For example, if you have a macro thesis driving a currency trade, you can use trend following trading strategies to help time your entry and exits. This can serve to both manage risk and reduce your worry (because instead of fretting about if you missed anything in the fundamentals you can simply let price be your guide).
So as you can see, I think trend following is very worthy of consideration for any FX traders looking to improve their edge. Overall, it’s a very diverse and effective strategy that is also surprisingly easy to implement. It works across asset classes and you can get started quickly. And that’s exactly why I think FX traders can benefit from a trend following approach!
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