One of the most popular mantras you will hear in the forex trading industry is that you should always ensure that you trade in the same direction as the overall trend. However while this may seem rather basic, it’s often easier said than done because there are times when the trend is not immediately obvious. So how do you successfully determine the trend?
Well there are lots of different ways but the most obvious way is to examine a basic price chart and see which way the price is sloping. If the price is noticeably higher at the right hand side of the chart than the left hand side then it’s obviously in an upward trend, and obviously the opposite applies for a downward trend.
However as I said before it’s often not as easy as that which is why you may like to employ one or two technical indicators to help you determine the trend. One of the best ones is the moving average indicator. I prefer to use exponential moving averages (EMA’s) and will often plot the 20, 50 and 200 period EMA’s in order to highlight the trend. If they all turn upwards then this indicates a new upward trend and vice versa if they begin to slope downwards.
Another indicator that is very useful is the supertrend indicator. This isn’t one of the more common technical indicators because it is not even included with a lot of charting packages, but it is extremely useful for determining the trend because it’s a line that’s either green or red at any one time. A green line signifies an upward trend and a red line signifies a downward trend.
I tend to use both the supertrend indicator and the exponential moving averages mentioned above because they really do help you to determine the trend at any given time. The key to success is to apply these indicators both to the current time frame that you are trading and the lengthier time frames as well.
For example if you trade off the 4 hour chart, then it’s often a good idea to determine the overall trend on the daily chart as well in order to keep you out of trouble. This is because if there is a clear downward trend on the daily chart then any upward trend that may be apparent on the 4 hour chart may only be a short-lived one, and therefore not a position that you would be able to trade with any confidence.
So to sum up, there are several different ways you can determine the overall trend but my preferred methods are to use a combination of EMA’s along with the supertrend indicator. That way by using these indicators across different time frames you should ensure that you will always be on the right side of the trend, and will therefore boost your chances of becoming a highly profitable trader.