It is very important to identify and understand a trend in forex because they tend to be vicious and one way. Forex trends routinely wipe out speculators like you and me who commit the trading sin of trend fading.

FX trends start slowly and are usually the result of another action taking place in the global capital markets. A booming stock market like that happened in the Tokyo Stock Exchange some years back may lead to a massive forex trend in its wake as an example.

Similarly, a global recession may force investors to take refuge in save haven currencies like dollar in their flight towards safety. Likewise, decrease in interest rates will force carry traders to become risk averse.

So you will have to keep one eye on the global macro situation developing to look in which direction smart money is going to flow. Most of the trends in forex markets are fundamentally driven by the direction of smart money flow.

The longer the trend is going to last, the longer the correction and the consolidation is going to be. In other words, fundamentally driven trends do not take U-turns all of a sudden.

But when the public realizes that a trend has developed, it is always too late. The professional traders and hedge fund have long been in the trade and are ready to unload their positions on the retail crowd.

As the saying goes, a Newsweek cover is a kiss of death for a trend. Trends are important for an individual investor to understand.

Remember trend is your friend. Trend trading is one of the most popular trading strategies employed by professional traders including hedge funds.

The best and most effective strategy involves taking a position in the direction of the trend. You can identify a trend in forex using multiple time frame analysis involving moving averages.

Once you have identified the trend, use Fibonacci retracement levels to enter and exit the position. Always put stop losses. If you successfully make a trade, you can make many pips in a few days.