How to Identify Trends in the Forex Market

Posted on 21st November 2017
How to Identify Trends in the Forex Market

A Forex market trend is a technical phenomenon which occurs when the price of a specific currency pair moves towards a particular direction over a certain period of time. Trend analysis is a crucial component of successful trading. In the currency market it's always profitable to follow & capitalize on trends and go with the momentum. Time is important while trend trading. The greatest favour any investor attempting to gauge trend strength can do to themselves is to get his/her basics right. There are various analytical tools in Forex Trading. Although indicators are extremely helpful sometimes basic tactics like analysing swing highs and lows can provide us with information on the existence of a trend or lack thereof. Many amateur traders even when facing a trend that has lasted for months are busy predicting reversals when they could have earned profits by simply joining the trend. Let's discuss how we can identify forex market trends:

 

Moving averages:

The moving average of the price of a currency pair is one of the best trend indicators. A moving average is the average of a number of various currency pair prices that alters with time. For instance, a six-day moving average is the average of the last six days; on the seventh day, the first day is dropped from the calculation of the average. If the moving average goes up then the market is on an uptrend and if it falls the market is on a downtrend.

Moving average crossover:

Many investors follow exchange rates of currency pairs on a chart that tracks a moving average. A crossover occurs when the short-term moving average of any currency pair prices climbs above or falls below the long-term moving average of the price of a currency pair.

Line graph:

Another way of identifying the direction of a trend is the line graph. The Line graph as the name suggests is a simple technique especially when you are on a higher timeframe to find out about the overall market direction.

Highs and lows tell the whole story:

During an upturn you have higher highs as buyers abound and propel prices higher and lows are also higher as buyers keep buying the plunges. Similarly, in case of a downtrend the lows are lower as a surplus of sellers push rates lower and highs are lower as sellers sell earlier and buyers are not as keen.

Channels and trend lines:

Channels and trend lines are another method to understand the direction of the trend and give you a better perception of range-bound markets. Trendlines are better suited to later trend stages as you need at least two touch-points to plot a trendline. They can be used to identify changes of established trends i.e. when you have a strong trend and suddenly there is an imminent breakdown. This signals the switch to a new trend. Trendlines during ranges are best for finding breakout scenarios when price enters the trending mode again. Again, trendlines can be clubbed with moving averages too.

ADX indicator:

The ADX indicator can be used to identify both the trend direction and the strength. It can be plotted with three lines: the ADX line that tells you the strength of a trend, the +DI line that signifies the bullish strength and the -DI line for the bearish strength. When price is ranging the two DI lines are in close proximity to each other and linger around the middle. The ADX can be combined with the moving average also to decipher trends.

Combining tools:

Trends can also be defined by combining methods. For example, the combination of consecutively higher moving average levels with moving average crossover shows an uptrend. An investor can also align price action with moving averages to delineate a trend. However, each tool & method has its own advantages and disadvantages and nothing can guarantee 100% success in your trades.

Conclusion:

In the end it all boils down to your choice of trading tools, how well you understand them and how successfully you can apply them in real-time market conditions. It is to be borne in mind that trend changes won't always be obvious. But the tell-tale signs are always there; you only have to look carefully. Every market is unique and it is imperative for you as a trader to collate the trends and apply them to actionable strategies in a way that stacks the odds in your favour.

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