How To Spot a Real Forex Trend and Protect Your Investment Against Market Volatility
Market trend direction is easily misinterpreted. Quite often, traders misread explosive price fluctuation that results from a press release or news event. If charts shoot up, due to one of these events, brokers, platforms and many analysis tools indicate a strong uptrend that tempts traders to enter a trade. The difficulty is, the market often enters a choppy zone and experiences a hard fall and traders experience a loss.
To avoid falling into this trap, focus on longer trends. Instead of trading, based on a few consecutive green candlesticks, look at longer trends. A good rule of thumb is to analyze at least 200 candlesticks to determine the correct trend direction. Draw a line from one corner to the opposite diagonal corner. If the price bars touch the line multiple times, you’ve found a reliable trend. This simple method, using pure price action, seems to be the most reliable method for determining a reliable trend.
Using Trend Draw Downs To Make More Profitable Trades
A trend drawdown is calculated based on price action. It tells traders how far the price went against the current trend and gives them an indication of when to make the most profitable trades. For example, if the full chart movement is 882 pips and the biggest movement against the chart direction is 233 pips, the drawdown is 26%.
To calculate the drawdown, use the following equation:
233 / 882 = 26%
Conservative traders prefer the trend drawdown to be at or below 20%. Large investors like to see trend drawdowns of less than 15%. You’ll find trends that match your trend drawdown preferences almost every day on at least one forex chart. If you happen to find a trend drawdown of 10% or less, you’ve hit the jackpot. When a trend drawdown is that low, you’re almost guaranteed to engage in a successful trade.
In addition to using trend drawdowns to protect your trades, you also need to protect your investment against market volatility. Using properly placed stop losses, helps to increase your profits substantially.
If traders place a stop loss right after entering the market and too close to their entry point, they risk losing their trade. As a profitable trader, you need to give the market a bit of breathing space, so your stop loss isn’t triggered too quickly. Some traders use a set number of pips to set a stop loss, which is somewhat risky. Your stop loss should be set to reflect the volatility of the market.
Setting your stop loss at the same number of pips as your trend drawdown, gives the market enough room to move, but leaves you protected at the same time. If the number of pips is too great for your current level of investing, chose a smaller size lot.
If you trade a mini lot and $233 is more than your risk tolerance, consider trading a minilot or don’t take the trade. There’s no advantage to taking small pip values to reduce your risk, because you’re more likely to hit the stop loss and lose the trade anyway.
The ultimate solution is to discipline yourself and be patient. Instead of searching the market looking for trades, watch a few currency pairs on all time frames and prepare yourself for successful trades. It can take you about 15 minutes to scan the currency pairs, but it allows you to pick only the best trending pairs with the highest potential for making profitable trades.