What is a forex trend?
It is very important for you as a currency trader to identify and understand a trend in forex because they tend to be vicious and one way. FX trends routinely wipe out speculators like us who commit the trading sin of trend fading. FX trends start slowly and are the unintended consequences of another action in the global capital markets. For example, a booming stock market may lead to a massive forex trend in its wake.
Similarly, global recessionary fears may force investors to take refuge in save haven currencies like dollar in their flight towards safety. Likewise, anticipating decrease in interest rates will take carry traders to risk aversion.
So you will have to keep one eye on the macro situation to look where smart money is flowing. As trends in currency markets are fundamentally driven by the flow of smart money.
The longer the trend is, the longer the correction and the consolidation will be. In simple words, fundamentally driven trends do not make sudden U-turns.
But when the general public realizes that a trend has developed, it is always too late for them. Professional traders and hedge fund have long been in the trade and are ready to dump their positions on the retail crowd.
Dont forget the saying: a Newsweek cover is a kiss of death for a trend. Trends are important for a retail trader to understand.
Always remember, trend is your friend. Trend trading is one of the popular trading strategies used 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 the trend identified, use Fibonacci retracement levels to enter and exit the trade. If you successfully execute this strategy, you can make a few hundred pips in a week.
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