What is a trend on the Forex market?
What is a trend in the Forex market?
A trend is a direction in which the price of an asset is moving. Trends can be upward, downward, or sideways. The trend can be observed on any timeframe, but in general the longer the direction is maintained, the more detailed the trend becomes.
How to identify a trend in the chart?
The fastest way to locate a trend is to observe the change in the price of an asset. An uptrend occurs when the price of an asset consistently reaches new highest tops and minimums. A downtrend is when the price reaches lower minimums and lower tops. The trend is considered to be sideways if the price fluctuates between the fixed support (lower border) and resistance (upper border) levels.
Trends can differ in terms of direction or speed. They can arise for various fundamental reasons and sometimes coexist. In other words, some trends can emerge within others. Each trend is viewed in the context of a specific timeline. The weekly chart of a trading instrument may show an uptrend, but when you look at the same chart in the smaller timeframe, such as daily, you may see several downtrends within this uptrend.
Obviously, trends in charts with large timeframes are formed over a long period of time, and the market needs much more effort to change its course than trends in short timeframes. The context of the selected timeframe is very important for trend trading. You can trade with the chosen trend in accordance with your trading strategy.
How to use trends for Forex trading?
The upward and downward trends are ideal for swing traders who make long-term positions. Sideways markets are suitable for scalping and intraday trading strategies where traders open and close positions multiple times throughout the day for quick profits.
Traders use trend lines and channels to select the optimal time to enter and exit the market.
In an uptrend, a line is drawn from one swing price low to a higher low, extending the line into the future as a changing support line. The optimal time to open a buy position is the moment when the price touches the trend line or approaches it.
The opposite rule also applies to a downtrend, where the trend line is drawn from one specific top point by connecting it to subsequent, but lower top point and extending the line into the future as a changing resistance line. The optimal time to open a sell position is when the price touches the trend line or approaches it.
In a sideways trend, trend lines are drawn as parrarel lines along well-defined support and resistance areas. Traders tend to open long positions when the price is at the support line or close to it, and short positions when the price is at the resistance line or near it.
As mentioned earlier, there may be other trends within some trends. An uptrend can consist of numerous upward or even downtrend trends.
Price never moves evenly and it is important to always adjust trendlines to reflect current market sentiment. When using trendlines, it is important to keep track of their gradient or slope. The steeper the slope, the more relevant the trend. However, steep trend lines break faster than flatter ones. Depending on your trading strategy, it is sometimes a good idea to draw more appropriate trend lines and avoid tracking every major price spike.
How are market trends created?
It is important to be able not only to identify trends, but also to understand what forms and supports them. Trends are mainly influenced by fundamental factors that affect the current market sentiment.
For example, a currency may grow or decline depending on changes in interest rates, unemployment rates, and other economic factors in the country in question. Trends can also be created by other traders. Collective actions of traders can determine support and resistance lines.
Human emotions can also create new trends. Fear, greed, and confidence are the main emotions that influence the trader's activity, and together they can determine the prevailing mood in the market.
How to use trends for effective trading?
When trading on price changes combined with trend lines, traders use channels.
Channels look like parallel trend lines drawn in such a way as to ensure that the current price is within the bounds of the trendline. Channels are ideal for setting landmarks. For example, in a downtrend, the lower line shows areas where the price can start to rise, and this will be the best time to exit a sell order.
Since trend lines serve as a guide for entering the market, it is recommended to use them in conjunction with other technical tools, for example, with various chart patterns. Traders can use trend reversal patterns to enter trades before price reversals.
Positions can be closed manually or using various stop orders. Take Profit is an order that locks in a predetermined amount of profit. On the other hand, Stop Loss limits your potential losses when the price moves against you.
Standard Stop Loss orders are best used in volatile markets that can become chaotic, for example during a news release. Trailing Stop order automatically moves the stop loss level set below or above the market price. It’s good for trend trading as it locks in profits as the price rises in a favorable direction.
In order to conduct a good technical analysis, every trader needs to know how to identify market trends and their relative strength. This knowledge will help you open and close trading positions in time, which in turn increases the chances of a positive trade balance.
Article last updated: 2022-10-28