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
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
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