Following the trends is the best way to make profit and those who are patient enough to stay with trends are usually profitable trader, of course if they know how to limit their risks properly.
Those who are interested in following the trends usually ask about the most trending currency pairs. Probably they mean the currency pairs that form trends, either uptrend or downtrend, more than the other pairs. But let’s say there are a few currency pairs that trend more than the others. Does it mean that we have to choose those pairs, wait for them to form trends and then we get in and follow the trends?
Probably that makes sense more for those who trade the shorter time frames like one hour. But those who follow the long time frames, like daily, weekly and monthly, can easily choose several currency pairs, check them once every day and then get in when a trade setup which can be the beginning of a trend, forms.
Choosing a trending currency pair and then waiting for it to form a trend on the shorter time frames looks like a good idea to make big profit, but it is not as easy as most traders think. The trade setups that form on the shorter time frames are usually tricky. Shorter time frames form too many false trade setups compared to the longer time frames. Even when traders use delayed and slow indicators like 50 or 200 moving averages, or MACD, they have a hard time to locate a trade setup that really works and the price moves accordingly after it.
Instead of choosing one or a few trending currency pairs and waiting for them to form trends on the short time frames, we can follow too many currency pairs, take the strong trade setups they form on the long time frames, and the enter the market and maximizing the profit. This can be ended to following the too strong trends that some currency pairs form sometimes.
I admit that there are some currency pairs that form stronger, longer and more stable trends compared to the other currency pairs, but the trends they form are mainly trade-able on the long time frames.
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What Is a Trending Market?
Before I show you some examples, please let me have a short short introduction about trend.
There are two kinds of trends: Uptrend and Downtrend
Uptrends form when price goes up and forms higher lows. So this is an uptrend:
You may ask why we don’t say we have an uptrend when price goes up and forms higher highs. As you can see on the above example, there are “lower highs” in an uptrend also, but the strength of an uptrend is in forming lows that are higher than the previous lows. It means when the price goes down and forms a low, it has to be higher than the previous low.
Downtrends form when price goes down and forms lower highs. So this is a downtrend:
Is that easy to distinguish a trending market?
Unfortunately not. Sometimes the price behaves strangely, even on the longer time frames. Therefore, traders have always tried to create and use some tools or indicators to become able to distinguish and locate the trends easier. Moving Averages are the most famous indicators that have been used by traders to locate the trends for several decades. Among all moving averages, the 50 Simple Moving Average or 50SMA is more common among traders.
There is a simple formula to use this indicator:
- We have an uptrend when the price is moving above 50SMA.
- We have a downtrend when the price is moving below 50SMA.
The other indicator which is also a moving average but with different settings, is 20SMA which is in fact the Bollinger Middle Band.
Let’s add these two moving averages to some charts and see whether they help us to determine the most trending currency pairs or not. And if they do, can they also help us trade the trends?
USD/CAD is the most famous trending currency pair. So let’s start from this currency pair.
As you see, although USD/CAD has formed several uptrends that each of them have higher lows, some of them are weak and the price has crossed the 20SMA and 50SMA several times when these weak trends were forming (the red moving average is 20 and the blue one is 50).
The question is how could we know that a trend was forming and we could enter the market on time to follow the trend?
If you use the moving average indicators, then you have to wait for the price to take a special direction strongly first. For example, it has to go up and move above the 20SMA and 50SMA. Then, if it goes down to retest the moving averages and goes up, that is the right time to enter the market to follow the uptrend.
This technique works theoretically, but in reality you will lose in so many trades to find a trend finally, because when the price goes down to retest the moving averages, you never know that whether it will go up again to continue the uptrend it had started, or it will go sideways and keeps on crossing the moving averages. If you check the above screenshot, you can locate several cases that the price has hit the moving averages, but has not moved up strongly after that. This happens a lot when the uptrend is not strong, or when the price wants to form a small downtrend, and then follows the uptrend.
One way to enter the market earlier and without having to wait for the price to take a direction and then hit the moving averages is that we follow the support/resistance breakouts. A support/resistance line breakout forms usually much sooner than the price strong movement above/below the moving averages. Refer to USD/CAD daily chart and see how many resistance breakouts formed before the price goes up strongly to follow the trend. The price didn’t move strongly after the breakouts like #3 and #4 on the below chart, but you could still get out at breakout if you would move your stop loss to breakeven on time:
I am not going to talk about the trading systems to follow the trends here, because we have already talked about them a lot. What I am trying to say here is that even if there are some currency pairs that trend more than the others, it is not that easy to follow the trend they form, unless you already master a trading system like technical analysis or candlestick patterns.
AUD/USD is another currency pair which is very famous in forming the long, strong and continued trends, sometimes even stronger than USD/CAD:
As you see on the above screenshot, there are several strong down movements on AUD/USD daily chart, but here you should also know how to enter the market at the right place and right time to follow the strong downtrends.
GBP/JPY is also a strong trending currency pair, but sometimes even when there is a trend (higher lows or lower highs) still it is impossible to enter the market and follow the trend easily. You will admit what I say if you see the below screenshot. There is a downtrend at the left, and an uptrend at the right.
What we have at the left is still called a downtrend, but it looks impossible to trade using the moving averages, or even technical analysis. Some parts of the right side uptrend are trade-able but there are some choppy areas and sideways movements at the middle of uptrend.
Trading the trends is not a myth, but is not that easy either.
USD/JPY has been trending up during the past a few years. There were some good chances to follow the upward movements:
USD/JPY trends on the weekly chart:
In general, mastering a trading system and using it to locate the too strong trade setups on the long time frames is the best way of follow the trends. Those who try to hit the bottom or top of the markets, usually lose a lot sometimes. Among these traders, are those who try to follow the most trending currency pairs on the shorter time frames.
Traders have to know that it is not possible to catch all the movements and strong trends, because we never know what trade setup ends to a strong trend. All we can do is that we take the strong trade setups, set a reasonable and proper stop loss and move it to breakeven at the right time. If the trade setup we take ends to the formation of a trend, then good.