I am often asked my opinion on the best ways to capitalize upon trends in the forex market. My general philosophy for taking advantage of the frequently occurring trends in the forex market on any timeframe is very simple. When there is a clear trend, especially one that is relatively strong, the best method for exploiting the directional bias is to trade breakouts of both consolidations and counter-trend retracements, all in the direction of the prevailing trend.

How does one know that a trend is in place for the chart timeframe one is viewing? There are many methods, including: trendlines, slopes of moving averages, correct order of multiple moving averages, ADX, visual estimation of relative highs and lows, higher timeframes, etc.

Once the existence and strength of a trend are established, the trader can then watch for price consolidation areas within the trend. This could be a chart pattern like a triangle, flag, pennant, rectangle, wedge, or similar. Or it could just be an instance where price is moving up and down in a tight range-like situation. The bounds for any consolidation can be established using chart drawing tools. This creates support and resistance lines that can be used as triggers for trade entry. Trades can then be placed if price breaks out of consolidation in the direction of the prevailing trend.

Similarly, even strongly trending currency pairs will have instances of counter-trend retracement. When price makes a counter-trend retracement, a counter-trend trendline can be drawn. Any breakout of the trendline in the direction of the prevailing trend can be used as a trade entry trigger.

In order to be truly effective, this simple philosophy for trend trading in the forex market should be accompanied by strong risk and money management principles, along with dynamic profit-taking practices. Trading in this manner, one may properly take advantage of the many substantial trend moves that occur frequently in the forex market.

For much more information on specific methods of forex trend trading, please check out the new FXstreet.com DVD set, “High Probability Trend Following in the Forex Market” by clicking here.

- James Chen, CTA, CMT

* For information on my DVD set, High-Probability Trend Following in the Forex Market, please click here.
* For information on my book, Essentials of Foreign Exchange Trading (Wiley), please click here.