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In one of our previous articles, you could find some information about the trend strategies that have become very popular among forex traders thanks to their relatively simple implementation through different trading platforms.
Before, we have also stated that the know-how of trend strategies is based on the identification of trends, their strength and directions.
For the monitoring of such factors, traders often use different indicators, where also the popular moving averages are included as well as the RSI index or different other stochastic oscillators.
A number of new traders often believe that the main objective of trend strategies is the revelation of so-called break-even points, so the point where a set trend changes. Unfortunately, this is not completely true. The main objective is to reveal such points and market situations, providing a potentially higher chance of success to traders (a higher probability that the market will follow the set long-term trend exists there).
We have already provided loads of information about trend strategies by now, so let’s take a look at some demonstrations of how the trend strategies can look like in practice.
Moving Average
Naturally, first of the demonstrations of trend strategies is nothing else than the well-known moving averages. In forex trading, moving averages are so popular and widespread that there are many possibilities the traders use them for. We have chosen a method of applying a fast and a slow moving average. During this method, the slow moving average determines the direction of a long-term trend and based on a fast moving average, following the meeting of certain conditions, traders often open trading positions.
At the image above, there’s the development of GBP/USD demonstrated, divided into three parts. First, the orange part, shows the market development moving sideways. The second, light blue, determines the rising market session. And, the last, the green one, shows the decreasing market trend. Now, let’s take a closer look at these sessions.
Orange session – outside of the trend:
As you can see, if the markets move sideways, they have the tendency to oscillate up and down, relatively strongly, while such sessions also experience frequent break-evens and hits not only by fast moving averages, but by slow MAs as well. Thanks to uncertainty (it’s hard to estimate where the market is going to move) in particular in case of sessions without any trend, it’s naturally better to wait until the market stabilized and reaches new trend.
Light blue session - rising:
In this session, it’s clear that if certain conditions are met (fast MA is higher than the slow MA, the price is found above both averages or the market is not oscillating now), then the traders may, with moving averages, achieve not only a very interesting potential appreciation, but at the same time, this method forms potentially high-quality entry signals.
Naturally, this method is no holy grail, what the market development in this session proves us. If you take a look at potential trading signals here, it’s clear that only the first four could achieve potential profit. And the last, fifth signal (in black circle) would bring losses to traders. Therefore, it’s necessary to take a careful approach to this strategy as it’s needed in case of all the others, so that there will always be some incorrect trading signals. It’s always necessary to count on that.
Green session - decreasing:
With regard to the fact that this represents an equivalent to a rising trend, in general, there was no need to add anything more to this session. However, an interesting development occurred at the session after the fourth entry signal, when a clear break through the slow MA occurred, what could mean for some traders that the end of the trend is coming.
Nevertheless, it wasn’t like that. It’s necessary to realize that for a potential change of trend, only the hit of slow MA (red MA) is needed and not only reaching or breaking through of MA!
Trend strategy based on oscillator - Stochastic
This is a relatively simple trend strategy where, at first, the trend line is drawn, determining the long-term trend (see above: red and blue trend line). And subsequently, the Stochastic oscillator provides information about potential entries to traders (entry signals).
If the actual trend is rising, then only the hitting of lower Stochastic level (level 10 hit at the image above) is considered as a potential entry signal trend for this strategy – and in case of subsequent break-even of indicator, a potential trading signal occurs. Analogically, in case of decreasing trend, the hitting of upper Stochastic level is the only decisive one.
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About the Author
Team Purple Trading
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