If you are learning how to trade Forex for profit, you should consider Forex trend following. The reason is nearly all of the top Forex traders in the world are long term Forex trend following and they make big profits so let's look at the basics of this method of trading currencies.
A Definition of Forex Trend Following
While many people, who trade Forex trends call themselves trend followers their not and this is due to the fact that the time period is to short. The commonly accepted definition of a trend following strategy is one which be looking, to execute trading signals in the market which are held for weeks or longer, with many long term trend following systems holding a trend for a year or more. If you are trading trends of less than a week, your a swing trader and trades within a day is either scalping or day trading.
If you want to be a trend follower, you are only going to trade the biggest and best trends. You won't be trading many signals but this doesn't matter because trading frequency, has no correlation with the profits you can make. A trend follower will have many losses which are small but these losers, will offset by a smaller number of winning trades which are big in size.
In terms of a trend following method, most will lose more trades than they make money on but the small number of winners, can give great overall profits over the longer term. I know a trader who losses, around 80% of all the trading signals he places but his average annual compound return is just over 70%.
Why It Works
The reason it works is obvious when you look at a trading chart of any currency pair. You will see that there are periods of sideways action but for long periods trends will be present ( either up or down) which can last for a weeks to years in duration.
These trends will always be there for traders to make profit from and this is because a currency, reflects fundamentals of a country which tend to change slowly. For example interest rates tend to rise and fall over long periods of time and periods of contraction and expansion normally last a long time and these are reflected in the currency.
The other point about Forex trend following is that trends always tend to last longer than most people think and most traders don't like to get into a trend in motion – they like to try and pick a top or a bottom. These traders sell into bullish trends and buy into bearish trends and this helps the trend continue.
The Advantages of Trend Following
The advantages of a long term trend following method are outlined below.
You don't have to trade much and you don't have to be glued to a quote screen; you only really need to look at prices once a day. This form of trading is therefore ideal for anyone, who wants to make money trading currencies in their spare time.
The logic is easy enough for any trader to understand and the evidence can be seen on a chart of big trends and how long they last. There will always be big trends and any trader looking at a chart can see how lucrative this form of trading can be.
You only need a simple Forex trading system to make money from trend following and we will look at a couple of very simple systems in a moment.
My own view is you can make money trading just by watching price action on a chart and if you do want to use indicators you can but don't use to many. There are many profitable Forex trend following techniques but all the best ones, are very simple in terms of they have very few rules which makes them very robust in terms of getting into and holding long term trends.
The fact you only need a simple trading strategy means, any trader can put together a simple and robust method which can be traded for profits.
Making Money With a Trend Following System
While this method of trading has many advantages there are some points which you need to keep in mind to enjoy trading success with it.
The first point to keep in mind is this form of trading requires patience and it also requires the discipline to bank numerous small losses and then, hold a trend and make money from it. As a trend develops, you will of course have pull backs and these can be hard to take – no one likes seeing open profit eroded and there is always the temptation, to bank the trading signal before profit is eroded more or the trade turns into a loss.
If you are patient and disciplined, this form of trading will suit you but most traders lack these traits and of you do – don't try it, as you will lose. Try a shorter term method such as swing trading where trades last for a shorter duration in time.
Forex Trend Following Information
If you want to try trend following you need to get an education and there are many free resources and free trading systems you can look at.
Richard Donchian's 4 Week Rule is a very simple 1 rule system which we discuss in detail elsewhere on this site and you should take a look at it. It makes money and is a ready made system which is free and profitable. Another system worth looking at are the Turtle trading rules.
The Turtle trading rules made hundreds of millions of dollars and are free online. While not as effective as they once were, they will show you the potential of trend following and show you how to incorporate proper money management and stop losses in your trading plan.
You should also study breakout trading which is the most common way of getting into big trends. There is plenty of free info on this method of trading and why, it works on this site and many others.
You can also read some books and the ones I would recommend would be – Curtis Faith's Way of the Turtle, Mike Covel's the Complete Turtle Trader and all the books, in the Market Wizards series by Jack Shwager.
These books are excellent because he interviews some of the best trend followers of all time such as Richard Dennis, Vic Sperandeo and Ed Seykota to name just a few and after reading the interviews, you will see that when trading with this method, mindset is as important as the method.
The trading method, needs to be logically based and have an edge but the real key is You – You have to adopt the right trading psychology to make it work which we discussed earlier in terms of trading discipline.
There is one theory which I would encourage any trader to study and its very applicable to trend trading and it's – Dow Theory. Dow theory is simply the best way of understanding how and why currency markets move and is a great theory to study in terms of your Forex trading education.
Forex trend following techniques are easy to learn, understand and very little of your time each day to apply. Most of the world's best traders trend follow and you should to. In my view, its the best way to trade currencies for the biggest profits in the least amount of time. Discover the Forex trend following and you will be glad you did.