One of the most-commonly repeated trading mantras is that the ‘trend is your friend.’ I will examine why this principle is useful and what it means. I will also cover how to use a technical analysis approach for trend identification, and which are the Forex pairs that trend the most.
Conditions constantly fluctuate in the 24/5 Forex market and knowing when to deploy the best possible strategy on certain currency pairs will improve trading results. Learn how to spot Forex trends with our quick guide below.
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Why Does the Trend Matter in Forex?
Trading in the direction of the trend can minimize losses.
Counter-trend trading is popular with seasoned traders and especially those that are classified as professional day traders. They can utilize strategies that capture price action more frequently, but it carries risk and is not ideal for 90%+ of Forex traders due to the frequent shifts in mindset it requires to be successful. Therefore, one of the first things many Forex traders do when analyzing charts is scan for trends.
What Influences the Trend in Forex?
Macroeconomic trends, particularly interest rate differentials, and factors like import-export data, rank among the primary influencers for trending Forex pairs.
The most recent example is the monetary tightening by global central banks. After 12+ years of ultra-low monetary policy that was a response to the global financial crash in 2008 and subsequently the covid pandemic, inflation recently spiked to 40+ year highs, forcing central banks to hike rates aggressively over the past 12+ months. It has created new interest rate differentials, which kicked off fresh trends, something missing in many Forex pairs for some time and consequently there has been a period of readjustment in trading strategies used in the last decade that may no longer work in this new macro environment.
How to Find Trending Forex Currency Pairs
While Forex traders can use a visual analysis of any chart to spot trends, a technical analysis approach will offer a more sophisticated and accurate method of identification. A three-SMA (simple moving average) filter is dependable and easy to use.
Here is how to use the Three-SMA filter:
- Open any chart.
- Apply a short-term trend 9-SMA.
- Apply a medium-term trend 20-SMA.
- Apply a long-term trend 65-SMA.
- If all three SMA’s trend higher, only buy based on your strategy.
- If all three SMA’s trend lower, only sell.
Noteworthy:
- The Three-SMA filter is not a trading strategy but merely a filter to identify Forex trends.
- Price action that consistently records higher highs and higher lows is said to be in an uptrend.
- Alternatively, price action that records lower lows and lower highs is in a downtrend.
Which Forex Currency Pairs Trend the Most?
With 100+ currency pairs available, traders often use algorithmic trading solutions to cover more pairs effectively in the Forex market, but manual traders can focus on the following seven currency pairs.
The three primary trend-trading Forex pairs are:
EUR/USD - The US and the Eurozone economies present the first and third largest economies as measured by GDP, where the US currently shows better GDP data, while the Eurozone has a trade surplus with the US. The EUR/USD is also the most liquid currency pair, ripe for trend spotters to identify directional plays across all time frames.
USD/JPY - Japan has the fourth-largest GDP-based economy and is the only G10 economy with negative interest rates while being a net-commodity importer. The Japanese Yen is also considered a safe-haven currency and the best currency for carry trading (give the interest rate differential), which can result in unique trends.
GBP/USD - The British Pound was the global reserve currency before the US Dollar displaced it, but London remains the financial capital of the world and the most dominant Forex trading center.
The commodity trend-trading Forex pairs are:
AUD/USD - The Australian Dollar closely follows trends in minerals commodities, especially iron ore and coal, which account for 25% of its total exports. It is also a proxy currency for the Chinese Yuan.
NZD/USD - The New Zealand Dollar follows soft commodity trends, with New Zealand being a key exporter of milk, fruits, meat, butter, and timber.
CAD/USD - Canada is a dominant oil and natural gas exporter, and the Canadian Dollar often follows global energy trends as a result.
A final trend-trading currency pair with a dual punch is:
USD/CHF - As a traditional safe-haven currency with a trade surplus and an indirect commodity currency, the Swiss Franc faces influences from multiple conflicting sources.
Bottom Line
Many Forex traders trade directionally with a bias for the current established trend following the ‘trend is your friend principle.’ Since counter-trend trading is not ideal for 90%+ of Forex traders, scanning for well-entrenched trends and using trend-following strategies makes the most sense. It will reduce losing trades, but Forex traders must monitor for trend reversals and act swiftly by adapting their approach when they suspect a trend has ended.
The EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CAD, and USD/CHF are currency pairs most trend trader’s favor. They often have well-established trends and deep liquidity, and every Forex broker lists them.
