4 Steps To Trading With The Trend

Trading with the trend is widely acclaimed as the best strategy for the noobie Forex Trader. There is a lot to be said for the old adage “The Trend Is Your Friend” and many worthy beginner traders come unstuck because they assume that the best way to enter the markets is to look to buy at the bottom of a trend or sell at the top.

Whilst this can be a prudent strategy, it is not for the beginner and takes a lot of practice and experience to be able to pull off trend reversals effectively.

Fear not, however, as trading with the trend can yield excellent profits and, as you practice with this method, you are naturally building up your skill set and experience. This can then later be used to great effectivity for more complex and more profitable strategies.

So, without further ado, let’s get started…

Step 1 – Identify The Trend

Here is a YouTube video that will walk you three methods to identify a trend:

3 Ultimate Trend Identifying Tips!

This is by far the most important step as, if you get this bit wrong, it will render the rest of the steps irrelevant.

There are 3 different methods that I recommend to correctly identify the trend and you can see a YouTube that I have created which focuses on this here:

My favourite method is to use Highs and Lows – this method consists of analysing the chart and plotting high and low points to confirm or invalidate the trend.

In an uptrend you would plot a series of subsequent high points. Underneath this, on the same chart, you would plot a series of subsequent higher low points.

As soon as you get a lower high point or a lower low point then the trend is invalidated and may be about to change direction.

Step 2 – Find An Entry Point

So, once you have correctly identified the trend, the next step is to work out where you are going to enter your trade.

Another mistake that a lot of beginners make is trying to trade both directions on a trend – this should not be attempted and is likely to cost you far more money than it makes you!

The best method for finding an entry point in an uptrend is to look for retracements back to the higher low areas. You have to make sure that it is at least the second higher low as only then is the uptrend confirmed.

You can then enter and potentially make money from the continuation of the uptrend. Don’t forget you should look for a candlestick signal or indicators/s signals as added confirmation that the trend will continue.

In a downtrend it is exactly the same process, except you are looking to enter at a retracement back to lower highs.

Step 3 – Use a Stop Loss

Always make sure you use a stop loss when trading! This is absolutely crucial! Spread Betting is leveraged and using a stop loss will deleverage your trades, meaning that you are far less likely to lose more than you originally invested.

A good rule of thumb for setting a stop loss is to put it below the lowest point of the higher low entry level on the uptrend and above the lower high on a downtrend. The amount at which you set the stop loss away from the higher low/lower high is dependent on the time-frame you are trading on.

For example, I mostly trade on the daily and 4 hourly time-frames and so I usually use a 100-150 pip stop loss.

Step 4 – Always Have a Target

This is far better worked out before you take the trade because you are far more likely to be thinking logically and clearly when you are in the initial planning stages of the trade than when it is in motion.

When in an uptrend I target my take profit 100-200 pips above the previous high and in a downtrend 100-200 pips below the previous low. This also tends to set my risk to reward ratio up to be at least 1.5-1 and often 2-1.

Make sure you don’t move your take profit target – it is important to make sure you are taking profits off the table and not get swept up in greed – this will lead to winning positions turning into losses.

Ok, that’s all for this blog post guys. I hope you enjoyed reading the article.

Don’t forget to check out my YouTube video on 3 methods to correctly identify a trend!

Until next time…