How to catch a trend that is changing in the Forex market? This is a million-dollar question, because if we were able to catch a new trend right from the beginning, we would open our position and enjoy the ride, earning a lot of money.
There are different techniques to try to catch the formation of a new trend. One of the most popular is focused on studying the candlestick patterns to understand what smart money is doing on the market and where the demand is addressed.
Candlestick Patterns to Master Forex Trading Price Action is an entire course to understand, through the use of the Japanese candlesticks, where the price is going and when a trend could change.
Another popular technique is the use of indicators. If you have ever watched a financial analysis on Bloomberg or CNBC, it is likely that you have heard something like: “Euro-Dollar is crossing the long-term Moving Average, it may be the beginning of an uptrend”. This is another valid method to try to catch new trends, although these indicators usually catch a new trend when this has already begun.
So you have different weapons to identify a new trend and make money trading Forex, but how can you say that the new movement of a currency pair is a new trend? How can you discern between a new trend and a simple correction of the price?
A parameter that can help you is the length of time.
Many financial analysts divide the trend in:
- Primary Trend
- Secondary (Intermediate) Trend
- Minor Trend
The first to identify these 3 different kind of trends was Charles Dow. He affirmed that the primary trend is the largest trend and it lasts for more than one year. Today, financial analysts agree that 6 months are enough to identify a primary trend, especially because in Forex market it is hard to find a trend that goes on for more than one year.
A secondary trend lasts from 3 weeks to 6 months; while a minor trend lasts less than 3 weeks.
Here we have USD/CHF on a daily chart.
There is a downtrend since December 2016 and probably now this trend has ended because the price has broken the channel, forming a new high.
What kind of trend is this? It goes from December 2016 to September 2017, so almost 10 months. It is a primary trend.
During this main trend, there are some corrections of the market that determine secondary and minor trends. In yellow, you can see the secondary trends (from 3 weeks to 6 months); in green, you can see the minor trends (less than 3 weeks).
The most important thing that you need to notice is that the secondary trend and the minor trend go against the primary trend. This is important because when we try to analyze the market to catch a new trend, we can have a negative surprise and discover that it was just a minor trend that went temporarily against the main direction of the market.
So how can you manage a position that seems to capture the beginning of a new trend?
- Always use the stop loss. You have identified a new trend, but you don’t know if it can be a main trend or just a retracement. Use the stop loss! In case you are wrong, you don’t want to find yourself with an open position against the main trend.
- Use 2 or more take profit. Let’s say that you are not sure that the new trend has the potential to become a main trend, but you are pretty sure that at least it will be a minor trend that will last for a couple of weeks. Instead of opening a position for 100,000 units, you can open 2 positions of 50,000 units each. This allows you to place the take profit for the first position at a reasonable level that can be reached even by a minor trend. The take profit for the second position can be placed much higher, trying to win the jackpot in case you were right and a new primary trend is about to begin.
- Consider to use a trailing stop order.
- Use the “Cornwall Capital Strategy”. Ok, I admit it, I have made up this name right now, it doesn’t really exist, but I’ll give you the idea. Have you ever watched “The Big Short”?
These two guys (not the actors) started with $110,000 and ended with $30 million in 4 years. In the movie, the strategy is explained in a very simple and effective way: “when they were wrong, they were wrong small; but when they were right, they were right big”.
You can do the same thing and, if you are right and catch a new primary trend, you can make hundreds and hundreds of pips, risking only 40 or 50 pips.
Catching a new trend is important and you have many tools to do it, but it is also important to identify what kind of trend is running and how you manage it.