‘The Trend Is Your Friend’ — This mantra and a quick formula to trading success has done wonders for many traders.
What it basically means is that, as a trader, you have greater chances of winning if you follow the trend instead of going against it.
Sort of like a wave surfer who surfs with the wave.
The trend trading rules are quite simple. You open trades only when a clear trend is present and at the best possible price level, and you try to ride the trend as long as possible.
As a trend trader, you generally try not to trade against the trend, betting on a reversal. Trading reversals is a completely viable strategy, but in this case I will focus on trading by following the trend.
If the trend reverses at some point, as it always does, you close your positions accordingly and wait until a new clear trend is formed.
It’s difficult to determine trending markets if various time frames show conflicting analysis. For example, H1 chart can show an uptrend and Daily chart can show a downtrend at the same time.
Which one should you believe? Which chart shows the real trend.
Here is a screenshot of a 30-minute FT100 chart in MetaTrader 4 with two trendlines plotted at both price extremes.
Here is a screenshot of the same asset on a Daily chart.
Trending markets can last from few days to weeks, or even months. This can be seen very well on Daily and Weekly charts.
How can a 30-minute chart depict such a trend accurately? The answer is — it can’t, it can only capture a very small portion of the whole trend. That’s why traders refer to lower time frames as market noise.
Generally, the Daily chart is the most important chart for trend analysis. It is used as main reference for most traders, even if they choose to chase smaller trends on H1 or lower charts.
Capturing and following bigger trends may take longer, but usually translates into more profit with less broker fees.
Meta Trader 4 is one of the most widely used trading terminals, especially by retail traders. It offers quick access to many regulated brokers and it is quite easy to use as a trading platform.
In addition to built-in free indicators, MetaTrader 4 offers a huge marketplace of third-party custom indicators and expert advisers.
But in this article, I will only look at the built-in free indicators of the MT4 terminal and explain how some of them can be used in trend trading.
Moving averages are one of the most commonly used technical indicators in Forex technical analysis. They are often used to identify forming trends as well as to define entry and exit points.
A Moving Average is plotted on the MT4 chart as a line which represents a calculation of the average price of previous price levels.
For example, if you are using a Daily chart and you add a Moving Average with a period of 21, then the line will display a calculation of the average prices taken from the recent 21 days.
See example below on GBPUSD Daily chart with MA of 21:
If you see the plotted MA line moving upwards with price levels above the line as in the example above, you’re looking at an uptrend.
In contrast, if you see the line going downwards, with most price levels below the line, you would be looking at a downtrend.
Some technical analysts follow more then a single Moving Average on their chart. They often add two, or more MAs with different periods, for example 10 and 21 or 50 and 200, and look for crossovers to determine a forming trend.
See example below on GBPUSD Daily chart with MA of 21 in red and MA of 100 in blue:
Here the crossover of those two moving averages, the slow MA of 100 days and the fast MA of 21 days, would mark the transition from a downtrend to an uptrend.
The Average Directional Movement Index indicator helps to measure the overall strength and intensity of a trend.
This Meta Trader indicator is non-directional. That means that it won’t show you the direction of a trend, as in the case with Moving Averages, but it will show you whether the trend is strong or weak.
The ADX calculates an average of expanding price range values from 0 to 100. When prices of an asset rise or fall quickly for a period of time, the indicator will show higher numbers.
Generally it is accepted that anything above the level of 25 marks the presence of a trend.
The Average Directional Movement Index (ADX) is a very good additional indicator that will give you more information about each forming trend, or the lack thereof.
Although the Relative Strength Index (RSI) indicator is not included in the ‘Trend’ category in MetaTrader 4, it can be found as RSI in the Custom indicators section.
Here is a screenshot of the MT4 menu tree and how you can access the RSI indicator.
The relative strength index measures the level of recent price changes and evaluates whether a given asset is overbought or oversold.
The RSI is displayed as an oscillator in a form of a line plotted between 0 to 100. Within that scope, two levels are significant, 70 and 30.
A common interpretation is that RSI values above 70 indicate that the asset is overbought (overvalued) and the price may soon reverse.
RSI values below 30 indicate that the asset is oversold (undervalued) and that a correction might be taking place soon.
Below is a screenshot of Crude Oil price on a Daily chart. The RSI oscillator is displayed as a blue line and the overbought and oversold levels, 70 and 30, are shown as thick black lines.
The most important function of the RSI indicator is to inform the trend trader about price extremes.
In conjunction with Moving Averages and ADX, the relative strength index can be a powerful tool that warns the analyst about possible upcoming price corrections or trend reversals.
Trading with the trend may seem simple in theory but live markets are often unpredictable. A well thought out trading plan can help you navigate the and succeed in forex trading.
The free indicators offered in Meta Trader 4 terminal are very useful in determining trends and can be used successfully in a trading strategy.
As I mentioned earlier, there are thousands of other custom MT4 indicators available on the market that might meet the needs of demanding analysts and traders.
See the MT4 Trend Indicator as an example of a good custom indicator for trend trading and following trends.
In the end, whatever trend indicators you decide to apply in your trading strategy, know that there are additional things that need to be considered before a trend strategy can be profitable.