One of the easiest strategies for Forex traders to adopt is to follow the trend. A trend defines the general direction in which the price is moving so that the trader can take advantage of it to make a profit. Trends can be upward, downward or flat. Here we will describe a simple way of identifying trends by looking at an uptrend and how to trade it, which will hopefully help you make your trading more profitable.
The first step in identifying an uptrend is to look at the general direction in which prices are moving. You can do this by drawing a trend line connecting the price data. If you notice that the price seems to be progressively moving upward as if it were a staircase then you may have found an uptrend. On the other hand, if it is progressively moving downward, with the price seeing lower lows, then it may be a downtrend. One you have identified a trend, you can start planning your trade.
The easiest way to enter a trade when trend-following is to wait for a breakout. A breakout happens when the price suddenly breaks the trend by moving to a higher high. You can easily open a trade by placing an entry order at a particular price level above the current one. Once the level is hit, a position will automatically be opened for you.
The challenge now is determining when to exit your position. This means placing both ‘take-profit’ and ‘stop-loss’ orders on either side of your entry price level. The take profit will be placed at your desired profit target, i.e. ten pips above the entry. The stop loss will be placed at a level that ensures the amount of money you will lose is limited if the trade goes against you.
You should use the risk/reward ratio that you’ve set as a way of determining where to set your stop loss and take profit orders. Determining a risk/reward ratio is an important part of your money management strategy and is something you should already have done before you have even started trading.
For example, if you have a 1:2 risk/reward ratio, you will set your take profit at 300 pips above the entry level and your stop loss at 150 pips below. This means that for every two pips of anticipated profit, you are willing to risk 1 pip of loss. This risk/reward ratio is a good one to adopt if you want to be profitable as a trader since it means that for every two losing trades, you only need one to at least break even.