3 Best Ways to Capture Long-Term Trends in Forex Trading
Most beginner traders in the Forex market tend to choose to trade with short-term strategies because of the perceived rewards of instant gratification.While there is no doubt short-term trading strategies can work well when trading forex, long-term strategies can also be as profitable, if not more so (than short-term strategies). The idea behind long-term approaches is to make fewer trading transactions with larger gains based on a trend following strategy – often called positional trading.
So, let’s consider the three best ways to capture long-term trends in forex trading.
#1: Know what a trend is
Before opening a position, you better make sure you know where you are within the main trend, so you do not trade against it.As described in Dow Theory, markets move in a general direction (up or down) but not in a straight line, as they will form peaks and troughs.A bullish trend is formed with higher peaks and higher lows, while a bearish trend is formed with lower troughs and lower peaks. When none of the buyers or the sellers are in control, you can often see a consolidation phase, where prices drift in a range. The best way to identify a trend is to look at chart patterns that will show the price movement of a currency or any trading instrument. By looking at charts, you will have a more graphical view of the price movement – whether they are moving up, down or sideways.
#2. Identify the prevailing trend
Dow Theory also explains there are three kinds of trends: a primary, a secondary, and a minor one. To find the primary trend, you need to look for a large movement lasting between 1 and three years. This trend is valid until there is a confirmed reversal signal.The secondary trend is usually the one that is a corrective movement against the main trend. It’s an intermediate trend lasting from 3 weeks to 3 months. The minor trend usually lasts less than three weeks and is often a corrective movement within the secondary trend. Once you have identified the prevailing trend, then you can adjust your trading strategy accordingly. As the market saying goes ‘the trend is your friend’ which means you will be better off trading with the trend instead of against it. Trading with the trend tends to be more profitable as it will allow you to capture the big moves whether in the forex, equities or commodities markets.
#3. Know what factors drive currencies in the long-term
Central bank decisions are among the most influential factors in the global forex market. A central bank is the monetary authority of a country that makes decisions about interest rates, inflation levels and other policies that affect the flow of money in a country. These often revolve around achieving price stability and a strong job market to stimulate economic growth. Any figures that are released on inflation, employment, consumer/business confidence, and growth are important to follow, as they can trigger volatility on currency pairs. This volatility is linked to changes in traders’ forecasts regarding the path of a given monetary policy depending on the available data. A central bank can either decide to tighten monetary policy or loosen it. Tightening will usually push a currency higher, while loosening will push it downward. This is the reason why most traders keep an eye on the regular central bank decisions such as those from the US Federal Open Market Committee (US FMOC), European Central Bank (ECB), Bank of England (BOE), Bank of Japan (BOJ), Reserve Bank of Australia (RBA) and Bank of Canada (BOC). Nowadays, central banks communicate quite clearly about the way they see the monetary policy in the future, so then investors aren’t surprised when things happen, and volatility is under control.
Traders should focus more on finding the primary and the secondary trends, as market noise tends to affect the minor trends much more. Trend trading requires finding the trend first, then managing entry and exit points using previous highs and lows to trade breakouts. To enhance your positional trading strategies, you can follow some general guidelines including:
- Always remember how to identify a trend by looking at highs and lows
- Once you know the underlying trend, work on your entry points with relevant money management tools
- Use small leverage and pay attention to swaps – these are the fees you will pay or receive for holding a position overnight
- Stick to your trading plan and control your emotions
- Know how to use trailing stop losses within your exit strategy