Several different possibilities exist for how to trade a freshly identified forex market trend. These strategies can vary significantly depending on the time frame that the directional trending movement in the exchange rate occurs within.
Essentially, once a trader has correctly identified the direction of the current trend – perhaps by drawing a trend line between successive highs or lows and observing whether it has a positive or negative slope – they will then be able to determine what period of time the trend covers.
They will also want to choose a trading strategy that is appropriate for that time frame to use to profit from the expected continuation of the trend.
The time frames for which positions are commonly held when trend trading usually consist of the following:
- Short-term Trend Trading – This strategy identifies short term trends whereby the trader looks to profit from moves occurring within a holding period that can be from less than one day to more than a week.
- Medium-term Trend Trading – In this strategy, the trader identifies the trend within a time frame that usually can last from a few weeks to a few months. For example, the long term trend can be higher, while the medium-term trend might be sideways, indicating to the trader to trade within a range.
- Long-term Trend Trading – Makes up one of the most profitable trading strategies when executed accurately by a seasoned trader. The objective of this type of strategy is to identify the long term trend, wait for an opportunity to establish a position at an optimum price, and hold the position until the major trend reverses, which can be anywhere from several months to several years.
Trend Trading Strategies for Different Time Frames
The next consideration undertaken by the trader might involve determining what type of trading strategy will be used to profit from the trend.
The kind of trading strategy employed may also depend on what time frame is associated with the trend as follows:
- Short Term Trends – A trader will often use a short term trend to take small profits out of the market. They will generally execute a higher volume of trades when trading short term trends.
- Medium Term Trends – Once a medium term trend is identified, it is usually traded by picking an optimal price, usually near support or resistance levels, to initiate a trade in the direction of the trend. The trader then aims to take profits as the market trades toward the medium term trend line drawn through successive major highs for an up trend and through successive significant lows for a down trend.
- Long Term Trends – Often the most profitable trading positions when traded effectively, a long term trader will typically wait for a pullback to initiate a position in the direction of an established long term trend. They will then hold a winning position until the end of the trend is reached and a clear sign of a reversal is detected.
Basically, trading appropriately with the trend entails a trader also considering the time frame involved in the movement, since the best trading strategy may not be as simple as buying when the market is in an uptrend and selling in a downtrend.