There are several analysis tools available for forex trading. If you see the charts that traders use, you will get confused between multiple indicators present on the charts. However, forex trading should be helpful only when you understand fundamental trend analysis done by easy tactics like analysis swing highs and lows, which provides us essential details about the existing trend of shortage thereof. Analysis of trends is an integral part of successful trading. On this page, we will talk about the process of spotting trends and how to trade trends in the forex market. But before coming into the process of spotting trends, you need to understand forex trends and check multiple kinds of trend tendencies.
What is a Forex Trend?
A trend is a price fluctuation, which includes natural price highs or lows. In other words, Trends are the tendency of price movement that shows overall price rises or drops. In forex trading, a currency pair will trend while rising or dropping for a more extended time period. Thus, the forex trend is divided into a bullish and bearish trend: a bullish and bearish trend.
Bullish Trend
We can consider the bullish trend while the charts show the higher bottoms and higher top. Suppose if the trend line at the bullish trend will join the price bottoms on the chart. However, the bullish trend line behaves as support. By following this trend, if new costs interact with a bullish trend line, we estimate the price will move in the bullish direction.
Bearish Trend
Bearish trends act inversely to the bullish trend. The trend is bearish, while the price action represents lower buttons and lower trends on the forex chart. During this situation, the bearish trend line is present among the swing tops on the chart. Resultant trendlines behave as a resistance for the costs. Moving according to this bearish trend, while new prices interact with the trend line, we will expect the price to move towards a bearish path.
What are forex trend lines?
There are various trend indicators present in the market. Although, one of the easiest and most efficient ways to determine trends is using trend lines. A trend line will be represented as a diagonal line that connects multiple tops and bottoms available on the FX chart. When a trend line easily connects a multiple price peak, in this case, we can expect the cost action to follow this trend line. According to this, we can tell that the major function of the timeline is to behave like a support or resistance for the price action.
The chart given below shows a traditional forex price trend with its specific trend line and eventual breakout.
In this chart, you can track the daily activities of GBP/USD currency pairs from Nov 2007 till Jan 2008. As marked in the chart, the cable price accounts for lower bottoms and lower tops. This shows the presence of a bearish tendency.
The red line present in the chart represents the bearish trend, which shows the price action downwards. And the black arrows point out the place where the price checks the trend as a resistance. Due to this, We achieved a 6 time touched bearish trend line. On the 7th position, where price interacts with the bearish trend, we gain a bullish breakout by the downtrend (shown by the red circle in the chart). Due to this, the price closes a candle above the bearish trend line by suggesting that the trend is broken and the GBP/USD cost direction will move reverse.
Major forex trend following System
A trending market has two types of organized price moves, which are present on the chart. They all are related to the trend, and they are necessary for you to understand a trend trading system. These two kinds of price moves are known impulses and corrections. Now we discuss complete details about impulse trends and trend corrections.
Trend Impulse
The trend impulse refers to a price move that takes place after the interaction of the trend line and happens while the price moves towards the trend direction. All these are the moves that trend traders prefer. This is because the trend impulse moves towards the more significant price movement for a quite shorter time period.
Trend Corrections
The corrective movement at the time of trend in forex comes after the impulse and moves the price back towards a trend. The correction moves present on the graph are not truly good for trading. Investors who have less trading experience need to stay away from the market when the price is available in a correction phase. This is because corrections are pretty minor and stay for a more extended time period than trend impulse.
How to spot trending forex Pairs?
Before starting a trade, you must learn how to determine a potential trend in underways. This is the general principle of any forex trend trading system. Seasonal traders will address you that “the trend is a very good thing for you” because the profit we generate from the trending pair is much bigger, and traders need to take fewer risks. Now you understand the advantages of trading trending pairs, and you need to make a few solid rules for picking a potential trend trade setup. Here we will explain some trading techniques for identifying possible trends.
Swing Tops and Swing Bottoms
Price swings are the general characteristic of each trend present on the chart. For example, suppose the top and bottom are increasing; this refers to the bullish trend, whereas if the tops and bottom are decreasing, this refers to the bearish trend. In the remaining situation, the market is referred to as a non-trending environment – a sideways market.
The 3rd Impulse with the Forex Trend Line
All points present on the chart are connected with a straight line. They are joined in pairs to two. However, if the third point line is situated on the same line of other pairs, then it is referred to as the tendency. With this method, the trend confirmation appears after the price tests the trend at the third touch and bounce from it. While you can see the bounce, you can open a position in trying to catch a new trend.
Here we are explaining with the example of EUR/USD through the above chart. The arrows present on the chart point to the place where the price experiences the bearish trend. The impulses are pointed by the green arrow, and corrective moves are shown by red arrows.
The tops on the trends are shown by the black arrows, which are present in the starting. These two are the points that are used for drawing a trend line. After this, we need to wait for the moment when the price interacts with the third point. The third arrow, which is blue in colour, is pointing to a solid bearish reverse of the trend line. This is considered as trend confirmation and taught us for a short position. The fourth arrow is also blue in colour, which means the trend is confirmed. A return and the bounce from the trend will also provide us with another trading opportunity through this method.
In this situation, two trades will help them in creating a trading opportunity. By the third touch, in reality, it will provide a better return to risk ratio.
Trading volumes
Volume plays an essential role in the process of identifying emerging trends. The main reason behind that is “in various cases the forex pairs will begin trending while volume has increased. By this method, the impulse trend movement is shown at the time of high trading volumes. At the time of high volume, there are multiple actions taking place in the market. However, high volumes provide awareness of emerging trend impulse waves.
This chart consists of the same trend as the above example, but we see volume indicators on the EUR/ USD chart this time. Must check that the trending volume is highly responsible compared to impulses and corrections, as pointed out by the arrows present on the chart. During the same time, when a volume begins calculation for the entire drop, we see that the EUR/USD price steps in a ranging phase that drags you towards breakout in the bullish trend. Then trend reversal will take place.
Warnings about volumes are given in forex because there is no centralized exchange in the forex market. Therefore, there is no centralized source for volume data. The volume readings are generally collected from data present at forex broker. And it will not show the entire picture of complete volume under the traded pair. Although, one must use a forex indicator while keeping all limitations in mind will help in trend analysis.
How To Trade with the Forex Trend?
Till here, you completely understand the process of spotting trends on the chart; now, we will discuss a method of tracking the benefits of trading forex trends. We will go through some trend trading strategies which are user friendly and quite easy to apply. We will use an assistant indicator for supporting our trend trading strategy. Moving Average Convergence Divergence (MACD) indicator is the best pick as an assistant indicator.
For trading trends by joining trend lines, we will take MACD and the volume indicator. We put effort into matching signals coming from the MACD indicator and the efficient emerging trend line and doing a volume analysis. Suppose you hold an upwards price move on the chart. During that time, the MACD signals a showing a bullish crossover below zero which supports the price increment. In this situation, we can go long until we get a contrary signal from the MACD. Must place your stop-loss order here below the bottom of the current swing.
The same method is applied for bearish trends. If the price begins calculating for lower top to lower bottom, we can apply a bearish MACD crossover above the zero to aim to short a forex pair.
Now we will explain how to apply this strategy with the example. Just see the image given below. We will start with a bullish MACD crossover. Now note down the time of crossover and continuously noticing afterwards, you see the EUR/USD costs are ranging. Although, at the time of horizontal movement, the EUR/USD trading volumes are slowly rising. Suddenly the price action constructs a higher top which breaks the level of the previous top. This thing shows us a chance of a possible price increment, and after doing a minor correction, there is an opportunity present for a long position on the chart. Must note that the stop-loss order is presented on the right side below the bottom, which should be used for a long position.
The price action moves forward with the latest impulse on the chart. These corrections generally hit the suggested place for putting stop loss placement. Due to this, the price action will not handle drops majorly below the past bottom, and the stop loss comes with the danger. The costs continue along with the two extra impulse moves and their nearer correction.
Must note that now place the Moving Average Convergence Divergence in the top section, showing that we should see the finish line for their bullish trend soon. However, the trade should take place until the Moving Average Convergence Divergence (MACD) line shows a bearish crossover, as mentioned in the starting of a trading strategy. The correct peasant at the end of the chart is delivering sharper than usual, due to which the two MACD lines are connected with each other.
Conclusion:
Now we reach the bottom of this article, where we can say that spotting trends in the forex market should be done through forex indicators and by the charts/ graphs created by them. Traders can analyze trends by learning how to spot forex trends in the data available in the form of charts. Here you can learn how to spot forex trends and how you can use them for making money.
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