Trend Following Systems

Big profits are made trend following the currencies and any currency trading system that catches them, has huge potential. While the trends look easy in hindsight, they are a little more difficult to catch in advance. Here are some tips on building you’re a forex trend following system.

Spotting the Big Trends

What actually is a trend? If you are looking at the long term ones, these typically will last for a few months to a year or more. They essentially, reflect the underlying economic cycle of the country they represent. Periods of boom and contraction last a long time and so do the currency trends that reflect them.

Using Support, Resistance and Breakouts

In trend following you will base your forex trading strategy on support and resistance, not just buying low and selling high but buying breakouts to new highs and lows. Most trends start from new highs and lows and any good forex trend following system should do the same – if you don’t trade breakouts with your trading system, you won’t catch the big moves and maximize profitability.

Prediction V Confirmation

Any currency trading system should be geared towards acting on the confirmation of price trends and simply following them. There are lots of systems that say they can predict prices in advance but they don’t work. Prediction is simply another word for hoping or guessing and that won’t get you far in any venture in life and certainly not forex trading. When trend following simply act on the confirmation as seen on your forex charts. In conclusion, trade the reality of price change NOT what you think may happen.

Profits to Losses

A good trend following system can make money on only 20% of its trades and still make big long term gains. This is a typical win and loss ratio to expect. The reason you can of course make money is - your profitable trades will be far bigger than your losses. You however need the mental discipline to keep taking small losses and hold and milk the long term profitable trends – this is the hard part and why so few people are successful at long term trend following.

The Problem for Most Trend Followers

Is they lack the discipline to hold long term trends. The bigger a profit becomes and the more volatility eats into their open profit, the more they want to take it, before it gets away. Eventually, they lose discipline and bank early.

What you have to accept is that when long term trend following you will always lose a bit of profit at the end of when the trend turns and you must also have your stop back far enough, not to get clipped out buy random volatility. This takes discipline and can be every lucrative. If you have acquire both traits, you can make a lot of money.

Putting a System Together.

If you want a currency trading system to catch long term trends then you need accept your losses are going to be frequent and you will have far more of them than winning trades. You then must have the discipline to hold and follow your winners.

Your system should be based on breakouts and you should confirm each and every signal with momentum indicators – no hoping or guessing! This should be combined with stops placed at entry. Then the key to the big profits is your trailing stop loss:

Don’t trail to close! Make sure your stop is behind random volatility, to keep you in the trend and accept short term drawdown to win the bigger prize. A good way to trail a stop is to use a long term moving average, combined with support and resistance. Sure, you miss a bit at the end of the trend but you don’t know when it’s going to end anyway, so that’s no problem. Keep in mind - if you caught 50% of every major top you would be very rich.

Finally…

Long term trend following systems seem to have gone out of fashion with retail investors, with most choosing losing methods such as forex day trading or scalping. Currency trend following however remains the most profitable form of trading in our view.

You need patience, confidence and the discipline to hold the few big opportunities that yield the big profits and take lots of small losses however, if you have the mindset to do this, you can enjoy spectacular currency trading success.