Understand what a Forex Trend is
It is very important for you as a currency trader to identify and understand a trend in forex because they tend to be vicious and one way. FX trends routinely wipe out speculators like us who commit the trading sin of trend fading.
FX trends start slowly and are the unintended consequences of another action in the global capital markets. For example, a booming stock market may lead to a massive forex trend in its wake.
Likewise, a global recession may force the investors to run towards save haven currencies like dollar in their flight towards safety. Similarly fall in interest rates usually forces carry traders to become risk averse.
So you will need to keep an eye on the global macro situation to look in which direction smart money is flowing. As most of the trends in forex markets are fundamentally driven by the flow of smart money.
The longer the trend is, the longer the correction and the consolidation will be. In simple words, fundamentally driven trends do not make sudden U-turns.
But mostly when the retail investors realize that a trend has developed, it is always too late for them. Professional traders, institutional investors and hedge fund have long been in the trade and are ready to dump their positions on the retail crowd.
As they say, a Newsweek cover is a kiss of death for a trend. Situations like these are important for an individual investor to understand.
Always remember, trend is your friend. Trend trading is one of the popular trading strategies used by professional traders including hedge funds.
The best and most effective strategy involves taking a position in the direction of the trend. You can identify a trend in forex using multiple time frame analysis involving moving averages.
Once you have the trend identified, use Fibonacci retracement levels to enter and exit the trade. If you successfully execute this strategy, you can make a few hundred pips in a week.
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