Following Forex Trading Trends

Forex charts show long term trends, often lasting for months or years and price fluctuations may mean profits ranging from $10 to $20,000 or more. If a trader can follow the trend accurately he or she can make large sums of money, but often traders cut off their positions when they see the trend reversing slightly. As a result they make losses because the trend can quickly reverse again.

As a trader, how can you use the trends to make gains instead of losses?

Using the trend to help yourself

As you follow the trend and you see a resistance level going to be breached, you go to buy. The price goes up swiftly and you are in profit and probably hoping to get even more. Greed and fear are the watchwords of most traders and they got so caught up in it that they end up limiting their profits instead of their losses. Though you may be following the trend, your emotions can get in the way. As you are in a profitable position, you want to take your profits home, before they disappear. This is fear.

Even if a trader knows that he must hold on to his position if he wants more money, he also wants to limit his risk. After all a small profit is better than a large loss.

What does he do? He makes a blunder

The trader ups his stop loss as the price goes up and this is only at the first resistance level, when the trend is actually upwards. It is easy to get stopped out even at the higher level and then miss the larger breakout. As most traders fall prey to this mistake, they lose money because they want to minimize their risk. Therefore they do not make large profits. They are risking their profit margins because they are not willing to take further risks.

Forex trading is extremely volatile, but this volatility means that, if you use it precisely, you can make large profits as long as you keep the swings within the trend. If you keep your trailing stop loss and close your position prematurely, you will lose out on the bigger gain.

A Dangerous Game

To get the most from the large trends, you have to take calculated risks. In cause you need to be holding on to your original stop loss position and ride the up move without putting in a trailing stop loss. There may be times when the volatility brings the prices down and you have losses. If you are confident of your position and reasonably sure that the up move will continue, you will need to wait it out.

You can never make big money unless you are able to hold on to the trend. Get used to taking dips in open equity when Forex trend following and keep your eye on the bigger picture. If you are unable to keep the risk-reward ratio, you will lose out on the larger profits you can make.

However, if you are able to follow the trend with confidence, if you can take the mental pressure, you have greater chances of making large sums of your capital.

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February 19, 2009 at 9:25 AM

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