Forex Trend Following System: Problem Or Solution

Many traders search for a forex trend following system as part of their trading repertoire. This can be a solid strategy to approach many different market scenarios. However there are also situations where this can be potentially dangerous and careful consideration needs to be given to how you approach your trading in these situations.

Forex trend following systems frequently work best on the crossover of moving averages. The better quality systems will also consider the higher time frame in addition to the current time frame. Whenever the higher time frame movement is rising, there are potential opportunities in the current time frame to be on an ascending movement as well. For example, when the price fluctuates in peaks and valleys on the current time frame, there is an opportunity to enter immediately after a trough appears.

However there are times when caution needs to be applied with this approach. An example is the common situation that occurs when there's an impending Non-Farm Payroll (NFP) announcement. There can be significant price movements earlier in the week prior to the announcement but the price can then be tightly range-bound for the rest of the week. As a result, the higher time frame would have shown as an upward trend as it would take into account the large movement earlier in the week. Trying to trade minor breaks based on the current time frame movement in an upward direction would've resulted in potentially losing trades as the price completely stagnated.

This is not an uncommon scenario so those traders using a forex trend following system need to consider ways to approach these types of situations. Some suggestions are:

* The price will generally consolidate after a big move in either direction. We'll often see a currency pair fluctuate over 500 pips in a week but this will often consolidate for the following week. When this situation applies, it is probably best to avoid any trend following system until you see a new price breakout and a fresh trend emerging.

* Be careful with any system that is only based on indicating an 'up trend' or 'down trend' signal. A good trend following system should also include a 'flat' signal to indicate a scenario where your system might not be relevant and therefore should not be applied at this time.

* Using a sound money management strategy would deter us from trading completely if we've had a string of losing trades. So if we've taken trades on consecutive days that are based on our trend following system, and we've stopped out for a loss each time, our money management strategy should tell us to stop trading until a new price trend emerges. Your strategy could also be based around finishing your trading for a specific day if you've incurred a predetermined percentage loss of your trading account in that day. If this occurs, it is better to take a break and evaluate your trading plan and strategies. There will always be opportunities to re-enter the market.

* If you find that your trend following system is not working for you in certain situations then make sure you identify and record these situations for future reference. At this time it might be worth considering a more appropriate system such as one that might be more relevant for markets that are consolidating or correcting.

So keep in mind that a good forex trend following system is not the answer to all possible trade situations. While it is a valuable tool to have in your trading toolkit, you still need to be aware of the right times to apply it.

About the Author:
Mark Thomas is the creator of Trade on Track - a secure web-based application that allows traders to track, analyze, and improve their trading. Visit Trade on Track for more information on how to take your trading and profits to the next level.

Article Originally Published On: http://www.articlesnatch.com

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