Understanding forex market trends can also help you determine whether your trading strategy is working and where it can be improved. Let’s have a look at how you can identify and understand trends in the forex market.
What are Forex Market Trends?
A forex market trend is a definite movement of a currency pair's prices over time in a specific direction.
An uptrend is observed when the market values of a currency pair consistently reach new highs, indicating to traders that it is appropriate to execute long orders.
The pattern, known as a downtrend, alerts traders to place short orders when they continue to make lows.
The market is said to be in a sideways trend and does not provide traders with any specific signals when the prices of currency pairs fail to follow a certain direction in the market.
Types of forex market trends
Major trend
Major or primary trends in forex markets occur when currency pair values move in one direction for a long time, either up or down. A trend might endure for months or years. Position traders can place long-term orders and profit from this trend.
Minor trend
A minor trend usually lasts anything from a few minutes or hours to an entire trading day. These patterns facilitate the short-term gains of scalpers and intraday traders.
Intermediate trend
Between major trends, there is an intermediate or secondary trend. The market moves in a certain direction over a short period of time between major trends.
How to identify trends in the market?
Highs and lows
Finding the highest and lowest price levels can help you determine the direction of the market's movement. In the forex market, swing highs are the levels at which a currency pair reaches its highest point prior to a decline. Conversely, swing lows denote the point in time at which the price of a currency pair hits its lowest prior to a reversal.
Visual inspection
The visual inspection process includes finding consecutive price peaks or bottoms that indicate a continuing market trend. When prices consistently reach higher highs and lower lows, a bullish trend is shown, indicating that traders should place long orders because additional price increases are anticipated. A bearish trend is shown when prices make successive lower highs and lower lows, indicating that traders should place short orders because further price declines are anticipated.
Clustering price levels
We refer to this as clustering price levels when the price of a currency pair moves over time around a specific key price level. In an uptrend, a price cluster typically forms around the resistance level, and in a downturn, it typically forms around the support level. A negative market reversal trend is indicated when the cluster forms near the resistance level, alerting traders to place short orders. On the other hand, a positive market reversal trend is indicated, and traders should place long orders when the cluster forms around the support level.
Combining different indicators
One effective method for identifying established market trends in the forex market is to use a combination of various technical indicators. A combination of indicators improves signal accuracy. When multiple technical indicators align to indicate an uptrend or downtrend, it increases the likelihood of an accurate prediction. Combining price actions with technical indicators can help confirm the market direction. For instance, when the currency pair is consistently reaching new highs in the market and the moving average indicates an upward trend, it signifies that the market is moving in a positive direction.
Top trend trading indicators
Moving Averages (MA)
Working with Moving Averages involves calculating the average price of a currency pair over a given time period and then comparing it to the current price levels. The single MA price line assists in identifying trends in the following manner –
- When the current currency pair price is above the MA line, it suggests an uptrend and encourages traders to consider placing more long orders.
- When the current currency pair price falls below the MA line, it suggests a downtrend and prompts traders to consider placing more short orders.
Average Directional Index Indicator (ADX)
The ADX indicator gives numbers from 0 to 100 that help you figure out whether the trend is strong or weak. You can join strong trends and stay away from weak ones based on these numbers.
Double Bottom Indicator
An indicator of a Double Bottom suggests a significant shift in the direction of the trend, potentially signalling a new uptrend. It suggests a market momentum reversal from the previous downward movement in prices, followed by another drop to the same level.
Moving Average Convergence Divergence (MACD) Indicator
The MACD indicator is widely utilised as a trend indicator for measuring market trend and momentum. It includes a short-term moving average and long-term moving averages. Identifying the type of trend in the market can be done by analysing the crossover between the two moving averages.
- When the short-term moving verse crosses the long-term moving average from above, it suggests an uptrend and prompts traders to consider placing long orders.
- When the short-term moving average crosses the long-term moving average from below, it suggests a downtrend and prompts traders to consider placing short orders.
Bollinger Bands
By gauging market volatility, Bollinger Bands aid in trend identification. The three bands are as follows: the lower band is two standard deviations below the middle band, the upper band is two standard deviations above the middle band, and the middle band is the simple moving average line.
The market's volatility decreases as the bands become closer to one another, and vice versa.
There is a strong uptrend and a signal for traders to place long orders when the values of the current currency pair are consistently touching or trading around the upper band.
A strong downtrend is indicated and traders are advised to place short orders when the values of the current currency pair are consistently hitting or trading around the lower band.
Top trend trading strategies
Ascending and Descending Triangles strategy
The ascending and falling triangle strategy suggests that the present trend will persist in the same direction for an extended period of time. Accordingly, traders should place long orders if an ascending triangle forms during an uptrend, as it indicates strong upward momentum in the market.
However, if a descending triangle emerges during a negative trend, it suggests that the market is in a significant decline and advises traders to place short orders. When forming an ascending triangle, the stop loss order can be set at the previous swing low; when forming a descending triangle, it can be placed at the previous swing high.
Trendline Breakout Strategy
Using the trendline breakout strategy allows you to identify potential price breakouts in advance, giving you the best entry point into the market. In this approach, you simply need to patiently anticipate a price pullback within a sustained upward trend. Connect the pullback's highs to create a trendline, and execute the trade once the currency pair price exceeds this trendline. This will assist in accurately timing trades in accordance with the current market trend.
Consider setting a stop-loss order just below the trend line to protect yourself if the market doesn't go your way. Just like a savvy investor, once the currency pair price drops below the trendline, it's a good idea to close your long order. This signals a potential shift in the trend. When a higher low surpasses its previous swing highs after the initial price drop below the trendline, it confirms a trend reversal. Consider placing short orders instead.
Catch a Wave Strategy
The Catch a Wave strategy involves analysing the short-term exponential moving average and long-term simple moving average to determine the market's current trend. As a result, traders are able to effectively navigate the market by leveraging two distinct types of market waves.
During an impulse wave, a currency pair's price moves in the direction of the overall market trend. A typical impulse wave is characterised by five swings, which suggest that the currency pair is following the trend in the market. Several bullish candles combine to create this impulse wave.
A corrective wave occurs when the price of a currency pair moves in the opposite direction of the overall market trend. With this strategy, you can analyse the number of pivots in each wave to make predictions about whether the currency pair will move against or along the market trend. A corrective wave typically consists of three swings, suggesting that the currency pair is moving in the opposite direction of the market's trend. Several bullish and bearish candles combine to create the corrective wave, with the bearish candles outnumbering the bullish ones. They suggest that the currency pairs will continue to follow their current trend.
Counter Trend Trading Strategy
The counter-trend trading strategy involves predicting a trend reversal and placing an order in the opposite direction of the current trend. This approach utilises swing trading and analyses various trend patterns to determine whether the bearish momentum outweighs the bullish momentum or vice versa.
Trading against the prevailing trend enables traders to capitalise on price fluctuations, regardless of whether the market is rising or falling. When a reversal is anticipated well in advance, traders have the opportunity to close their existing long positions during an uptrend and open short positions during a downtrend.
Conclusion
By closely analyzing a currency pair's price chart, you can predict market trends before they occur. Begin trading on a forex trading platform, and master various techniques to anticipate and identify market trends well in advance.
Utilise trend trading indicators and strategies to effectively enter robust trends and avoid feeble ones. Trading in a trending market enables you to capitalise on forex trading opportunities at the optimal moment. To analyze the trends, either enroll in a live trading account or give a risk-free demo account a try.
