Trend analysis is a type of technical analysis that focuses on the trend to analyse price behaviour and predict future movements. In the Forex trading market, the trend is considered by traders to be their friend, and Wall Street believes you should never go against it.
Forex Trend Analysis Explained
Trend analysis aims to detect and predict price trends. Detecting the trend helps in making trading decisions; you can buy in an uptrend and sell in a downtrend until prices suggest a trend reversal.
Trend analysis is one form of forex technical analysis, that is based on the idea that historic price movements give traders an idea of what will happen in the future. This type of analysis can be applied to any time horizon, whether it is short, medium, or long-term. That’s why it is suitable for different trading styles.
Traders can make profits when they trade along with the trend and not against it.
Types of Trend Analysis
The trend is the general direction in which the market price of an asset moves. Trends are categorized into three types:
- Uptrend (Bullish)
- Downtrend (Bearish)
- Horizontal (Sideways)
There is no specific timeline for a direction to be considered a trend, but the longer the direction is sustained, the more reliable the trend becomes.
How to Identify a Forex Trend
Identifying the Forex Trend is the best way to find an edge in the market and become a successful trader. Even though this is not a forex trading strategy, understanding forex trends will provide you with a solid foundation. Your transition to profitable trading will be much easier if you have a solid knowledge base, as trend analysis is fundamental and could transform your trading to great success.
Identifying a Trend in the Forex Market
Trends can be identified using trendlines that connect higher bottoms in the upward direction, lower highs in the downward direction, or convergent highs and lows in a horizontal direction. Let’s go through each Forex trend one by one.
Step 1: Identifying the Upward Trend (Bullish)
An upward trend is a bullish trend in the Forex market. This implies that the price of a currency would continue to increase over time. As a result, there will be higher peaks after troughs and higher troughs after peaks.
A Forex upward trend line is drawn by adjoining two successive low prices and can be validated as a price trend by drawing the straight line between more than two successive low prices. In other words, a trend line will always be drawn below the geometric patterns displayed by price movements on a trading chart.
In trend analysis, you need to be aware of these two things if you want to determine whether a market is in an uptrend. When the price surpasses a peak, it will inevitably cause a new peak to appear. The task at hand is to wait for the market to confirm a new trough, one that is higher than the previous one. At this point of trend analysis, one might be able to describe an uptrend as occurring.
Step 2: Identifying the Downward Trend (Bearish)
In the forex market, a downtrend is distinguished by price declines, usually accompanied by partial consolidations or movements against the prevailing trend. In contrast to an upward trend, a downward trend results in a less rapid rate of change over time and signals the continuation of a downward movement.
When it comes to trend analysis, a downtrend is characterized by a series of lower peaks and valleys in the price graph. A downward trend line in forex is formed by finding two and more consecutive highest highs of the price movement that follows.
As compared to other financial markets, the Forex market is less vulnerable to downturns. Since selling is a common occurrence in this market, price declines are quite unlikely to affect it. Even during financial or economic turmoil, the trade of one currency against another usually means something is going up.
Step 3: Identifying the Horizontal Trend (Sideways)
In trend analysis, a sideways trend is a horizontal price movement between levels of support and resistance. It occurs when the market has no sense of direction and consolidates most of the time. Forex trend analysis reveals that 80% of the time, the market goes sideways, and all professional traders focus on the remaining 20% when the market enters a trend. In simple terms, “When a trend goes up, your profits also go up.”
A sideways trend can be seen as horizontal lines between drops and falls in the exchange rate. Price rises or falls upon the end of the trend, which can last anywhere from a few days to a few weeks. Most often, after a sideways trend in the market, a currency price will move back in the direction that it was before the trend began.
During a sideways trend, currency prices behave more steadily. This provides an ideal entry point for investors who employ targeted strategies. However, traders tend to lay low during a trend that is sideways until a new trend emerges.
Below is a picture showing all the trend direction changes.
The trend line is a charting technique that uses lines to simplify the direction of a currency. While a channel consists of two trend lines parallel to each other. The channel can be used to interpret the support and resistance levels.
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