5 proven rules for trend trading

Rule Number 1: Build your trading plan in the first place

A sound trading plan with technical and money management rules that you will be following with discipline is the first and foremost element to be taken into account, independently of your own trading style.

You need to have a plan for entries and know what to expect and how to proceed when the price will be reaching the upper or lower trend lines: you should be waiting to sell the currency pair when it touches or comes near the upper part of the trend channel, and have your stops already calculated and set above the line at a proper distance and according to your own allowed risk levels. In the same way, when the prices are approaching the base of the trend channel, you will be waiting to buy and will already have the corresponding stops in place.

Rule Number 2: Avoid steep-angled slopes

The best slope angle for a continued trend will be 45 degrees or less. Only trade those, as steep movements that lead the price line above this angle are usually sudden and short-term; most of the time, the market will not be able to sustain a continuation and it is very common that after such a strong and fast move in one direction it will come back and reverse. Steep and sudden trend lines do not reflect with accuracy the general conditions of the real and steady underlying trend.

Rule Number 3: Wait for a proper entry before taking a trade

A trend line, especially if you are day trading, is not considered valid until it has been respected at least three times. You need two points to draw the line, but you will need to wait for a third reaction off the channel boundaries to consider entering a trade.

The best practice is to use the third, fourth or fifth bounces as a maximum. Above five bounces, it would be possible that the market could enter an exhaustion phase and though there might still be some momentum left in a very strong trend, the risks for a failure would be much higher.

Rule Number 4: Only trade in the direction of the general trend

As a day trader, you can be trading a shorter time frame where trends are short-lived in regard to the main trend, you can have a series of up-trends and down-trends along the way. However, you will have to make sure that you only trade in the same direction of the longer time frame general trend. For example, if the main trend is bullish, and in your lower time frame the prices are reaching the upper line of the trend channel, you should not short the currency pair. Instead, you will have to wait until the prices go back to the bottom of the lower trend line and only then enter a buy. This will increase your chances of success because even if price breaks the trend line you still are going in the direction of the main trend. This is important especially for day trading.

Rule Number 5: Only trade along active sessions

The best times of the day are those where volatility, liquidity and momentum are greater, and you will only find those during active sessions, where there are at least two market sessions involved. For example, trading during the confluence of Europe, London and USA markets for most pairs, or Japan, China and Australia for Asian currencies. Banks and professional institutions and traders are actively participating, and those are the moves that you will want to be following. All of them are watching the markets and using trend lines, support and resistance along with typical price action, there will be much more liquidity in play thus a strong potential for bigger moves and thus greater profits for you as a consequence. Finally, it has been observed that trend lines are usually more respected during those periods.