A Forex trend has a way of fooling inexperienced traders into losing positions from their winning positions. It is important for Forex traders to be well versed with trend analysis so one can identify a change in trend direction to avoid fake outs and manage to trade on the right side of trend movements.
Simple steps to identify a change in Forex trend
- Mark the swing high and swing low on your charts to determine the current trend.
- Once a swing low of an uptrend is broken or a swing high of a downtrend is broken, the direction of the forex trend will change.
- A trend change can be easily identified, but it is surprising how many traders get trapped on the wrong side because they don’t understand the concept.
A forex trend indicator is best determined by examining price and observing a change in market structure, as shown in the image below.
The easiest way to find a new trend is to find a trend that breaks a lower high. Depending on your trading preference, you can do this in any time frame. See how lower highs are ramping up into a trend direction change in the image above.
Short term, Long term & Intermediate trends
In the Forex trading landscape, a long term or major trend usually lasts longer than one year. Depending on the nature of the trend, an intermediate or secondary trend can last anywhere from three weeks to a couple of months. While the short or near-term Forex trend is generally shorter than three weeks.
Sometimes, an intermediate trend may represent a correction of a major trend. There may be a series of intermediate peaks and troughs within the intermediate trend itself, each of which can be identified as a near-term trend. For trend analysis, long-term forex trends are best viewed on daily charts, while intermediate trends should be viewed on hourly charts, and short-term trends should be viewed on 15-minute charts.
Trend Analysis Strategies
Most Forex traders usually identify the trend by turning to technical analysis. Technical analysis involves both trend lines and indicators. The following section describes them one by one.
1. Line graph :
Most Forex traders read a chart by identifying bars and candles. A line graph is a simpler and more effective way to read a chart. For trend analysis, an easy and fast way to identify the trend direction is to use a line graph instead of bars and candles that provide detailed information. For you to identify a trading trend, this is a good place to start.
2. Highs and Lows :
A very easy way to identify a trend is to look at charts for highs and lows. An uptrend in this context means that the price is making a series of higher highs and higher lows.
A downtrend, on the other hand, refers to lower highs and lower lows due to a larger number of sellers pushing prices downward; lows are also low because sellers are selling but there are no interested buyers. No indicators are required for this type of trend analysis. This method is purely based on price action.
3. Trendlines :
Trends lines provide a more graphical representation of market behaviour that helps Forex traders make their decisions about whether to ‘buy’, ‘sell’, or even issue a ‘stop-loss order’ in trading. According to the Dow Theory, market prices always show a trend after discounting several factors like the political environment that affect the market. In this sense, trend line analysis only studies the behaviour of price based on the previous assumptions.
Basically, traders will enter long positions when the price trend is getting up. On the other hand, they sell when prices are getting lower. Trend lines help to identify entry and exit points through support and resistance levels. Another way to use this strategy is to wait for a trend reversal to enter the market. Eventually, any price trend will come to an end.
4. Moving Averages :
A skilled trader can anticipate trends with their honed trading instincts. But for new traders, it is very useful to have an objective method for identifying and confirming trends. It offers new traders the opportunity to learn first and then improvise later. A moving average is one of the most useful tools in this regard.
A moving average is a calculation to analyse data using the average change in a data series over time. It is a common technical analysis indicator. Moving averages help in identifying the continuity of a trend. Usually, traders enter long positions when a short-term moving average crosses above a long-term moving average and vice versa.
5. Momentum Indicators :
Momentum indicators are used to measure the strengths and weaknesses of price trends. Common momentum indicators include the relative strength index (RSI) and moving average convergence divergence (MACD).
The Moving Average Convergence Divergence (MACD) indicator helps traders identify trends by calculating the average price of a security over a specific period. This trend trading strategy is the most effective because it involves several traders entering long positions at a timeframe where the short-term moving average is higher than the longer-term moving average.
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