While trading forex online, we’ll inevitably have to deal with a large number of scenarios and conditions that are often difficult, if not impossible to predict in advance. Traders have different responses to this unpredictability problem, but many prefer to make use of fundamental tools for gaining long term visibility while analyzing the price action. A trend following strategy is an excellent tool with which we can take advantage of fundamental methods, and here we examine two main approaches in which this trend following approach applies to the market.
Since prices demonstrate fractal behavior, one can create a trend following strategy on a five-minute or five-day chart with equal efficiency, if we exclude the compensation of the broker. When this last factor is taken into account, however, a trend following strategy is more favorable the longer the time frame of the trade is.
1. Short Term Trend Trading
We suggest this approach mostly for practice trading. An excellent way to practice the trend following method is to apply it to five minute charts with a tiny commitment of capital (and small position size and leverage), so that within the framework of a trend following approach a large number of strategies can be tested, with only limited risk. If we were to study trading on long term charts, we would have to wait a long time before we could gather the necessary experience. The fractal nature of market action makes it possible that we apply the same strategies that work on a five-minute chart to a five month chart with the same effectiveness. Of course, while evaluating the results of short term educational trading, the spread cost must be excluded from the end result in order to achieve a better representation of potential long term gains (where with long term price action the effect of the spread is mostly negligible.)
2. Long-term Trend Trading
This is the main method favored by those who practice the trend following approach. There are more advantages associated with this method than the scope of this brief article would allow us to detail, but we can mention the lower number of trades (hence lower fees for the forex broker), greater benefit from fundamental analysis, the possibility of adopting a meaningful layered approach, the added confidence gained from being able to hold a position for the longer term. Nonetheless, it is difficult for a beginner to apply this method right from the beginning, and that is why we suggest that the introduction take place through the exploitation of short-term trends.
Trend following is just one of many possible forex strategies, but it has the best potential for profitability, and also for inculcating the necessary qualities in your trading psyche. Trading requires commitment, and by a committing to a long term strategy you will improve your chances of success considerably.
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