Determining the forex market's trends can help you determine whether your trading strategy is working as intended and where you can improve. In this article, we show you how to identify and trade forex trends.
What is a trend?
We refer to a market moving in a single direction overall as a trend. A market can move in three different directions: horizontally (range bound), upward (bull run), and downward (bear run).
A forex market trend is a definite movement of a currency pair's prices over time in a specific direction.
Whatever your preferred approach, being able to recognise and categorise trends as they emerge can help you trade more profitably.
The three main types of trends in forex
1. Major or primary trends
In the forex market, a main or primary trend occurs when the prices of currency pairs move in a dominating direction for an extended period of time, either upwards or downwards. A trend like this can continue for several months or even years. Position traders can place long-term orders with this kind of trend and benefit from long-term gains.
2. Intermediate or secondary trends
In between major trends, there is an intermediate or secondary trend. During a significant trend, the market travels in a particular way for a brief period of time.
3. Minor trends
A minor trend usually lasts anything from a few minutes or hours to an entire trading day. It happens very briefly. These patterns facilitate the short-term gains of scalpers and intraday traders.
Let's look at a market that has been rising over the past year as an example. Let's assume for a moment that a news event triggers a rapid bearish trend in the market, lasting for a month. Not too long after, the market begins to rise once more. We'll refer to the abrupt bearish trend as an intermediate one. Medium- to long-term traders can use these trends to trade in or against the market, making profitable entries or exits.
How to trade with trends
Your chosen method will determine the kind of trend you look to trade.
Position traders and other long-term investors search for major trends. They will then be able to catch bigger moves and make the substantial profits their plan calls for. Swing traders and other medium-term traders could try to latch onto secondary trends that last a few days or a few weeks. On the other hand, scalpers and day traders will only focus on small trends.
Regardless of your strategy for the markets, your ability to predict trends accurately will frequently be the difference between success and failure. Your profit margins will increase quickly if you can take positions when they arise and close them before they reverse.
Tools for trend trading
Technical analysts have access to a variety of resources for discovering and categorizing patterns.
Trend lines
In order to identify bull and bear markets, trend lines are a simple tool to use. You can apply them to charts to determine the direction and intensity of trends.
By reducing the amplitude of price fluctuations, trend lines make it easier to see the general direction of price movement in a market. They cut through the noise to identify underlying bull or bear runs. Consistently rising highs and lows over time indicate an uptrend.
To apply a trend line to a chart that you believe is showing signs of a bull run, all you have to do is draw a line connecting three or more of the market's low points, which are instances where the price has decreased and then turned around. The line pointing upwards confirms an uptrend. A steeper line indicates a more robust shift.
Conversely, falling highs and lows are tell-tale signs of a downtrend. Draw a line connecting three high points to identify a downtrend. When it falls, it signifies a bear market.
Two points can infer a trend, but three are necessary to consider it proven. The market is said to be range bound when the lines are horizontal.
To maximise your profit within a trend, look for regions where the market is staying close to its trend line and create new trades there.
Patterns
Many traders use chart patterns to see trends.
Typically, a market chart will display a staircase pattern, either rising or falling, when it is in a trend. This occurs when the rate of change is exponential.
Technical traders, on the other hand, think there are a number of patterns that might foretell when a trend will start to reverse or form. Triangles, flags, and wedges are all examples of such shapes.
Channels
Additionally, you can use trend lines to identify channels. A market's price movement zigzags back and forth between two parallel lines to form a channel. To locate a channel, one must draw a trend line on the chart connecting two high points and another between two low points.
If prices stay within this range, you can make money trading the channel by selling high and buying low.
Indicators
A trader might also benefit from indications when trading with the trend.
The moving average is one of the most commonly used trading indicators. This can help you predict when a market is about to start trending by giving you an average of the price changes over a specific time frame. However, the Relative Strength Index (RSI) generally measures the strength of continuing moves.
Volume
Looking at volume is one way to find trends. One way to gauge the strength of a move is by looking at the volume of trades in an asset during a particular session. A market's upward trend may not last forever if very few people buy it.
There is no foolproof way to find profitable trading opportunities using indicators or patterns, although they can be helpful. Always prioritise prudent fiscal management and risk mitigation.
How to identify trends in the market?
Combining a variety of indicators
In the foreign exchange market, integrating many technical indicators is one approach to spotting verified market patterns. It is more probable that a forecast would be correct when multiple technical indicators show that the market is in an uptrend or decline, which is why combining them assists in receiving more accurate signals.
Technical indicators, when combined with price movements, can further validate the market's trajectory. If the moving average shows that the currency pair is rising, it means that the market sentiment is bullish, and the price action is likely to continue.
Visual inspection
Looking for a pattern of repeated price peaks or valleys is one way to visually check the market for signs of a continuing trend. The formation of higher highs and lower lows in a row is a bullish trend that tells traders to put in long orders because they think prices will keep going up. Traders should prepare to place short orders when prices make lower highs and lows in a row, since this suggests a bearish trend and further price declines are likely.
To identify current market trends and directions, visual analysis also involves analyzing price charts with technical indicators such as Bollinger Bands, Moving Averages, Convergence/Divergence, and more.
Highs and lows
If you look for the market's highest and lowest points, you can tell which way the trend is going. When talking about the foreign exchange market, "swing highs" are the points where currency pairs' prices reach their highest point just before a turn around.
Swing lows, on the other hand, are the points at which a currency pair's price drops to its lowest point just before a reversal.
Traders should prepare for a bearish reversal and place short orders when the price of a currency pair reaches its all-time high, since this implies that the present trend is an uptrend that will shortly be followed by a decline.
If the price of a currency pair falls to its lowest point, it means that a downtrend is underway, but an upswing is on the horizon, so traders should anticipate a bullish reversal and place long orders.
Clustering price levels
In a clustering price level scenario, a currency pair's price tends to cluster around a single important price point over time. When prices rise, a price cluster forms at the level of resistance; when prices fall, a price cluster forms around the level of support.
The formation of a cluster around the resistance level is a signal for traders to place short orders, as it suggests a bearish reversal trend in the market. Traders should place long orders when the cluster forms around the support level, as it suggests a positive market reversal trend.
Pros and cons of forex trends
Pros
Trends can be traded on any time-frame
Risk/reward ratios for good trend-following strategies are high
Great rewards
Cons
Trend trading strategies typically have lower winning percentages
Requires patience to find good trends that will offer up good reward relative to risk
Conclusion
Trading in the direction of a trend is ideal, but you should be aware that a trend can only go so far until a correction or reversal is necessary. By paying attention to market sentiment, tracking news announcements, and using technical analysis to schedule entrances and exits, you can develop your own rule-based strategy that is easy to implement and profitable.
