The trend is your friend. This is the main principle of successful trading with traders, which was relevant several decades ago. And now, trending strategies are gaining popularity again. Therefore, for profitable trading, it is important to understand what a Forex trend is. Without this, a common understanding of the market and gaining profit in the long term is impossible.
How to determine a trend in the market is the first thing a beginner should start to comprehend market analysis.
What is the Forex trend: classification and definition
When the market moves in a certain direction (horizontally, up or down) for a long time, they say that the price is in a market trend. That is, it moves stably under the influence of some factors.
What is the trend in general? This is a graphic display of the mood of market participants - sellers and buyers. If the market is dominated by buyers, then the price is rising, that is, it is in an upward trend. Conversely, the presence of sellers in large numbers indicates a bearish character, which provokes a fall in prices and the beginning of a downward trend.
We turn to the main law of the market. So to say, the basis of all trade. If demand exceeds supply, then price begins to rise. And vice versa. In the Forex market, the situation is identical.
In order to maximize profits for a trader, it is necessary to trade in a trend. That is, to be on the side of the strongest market participants. And for this you need to learn how to determine the Forex trend and understand at what point it is better to open a deal in the direction of the main market trend.
To begin with, we’ll figure out what market trends generally are. There are two types of classification - by time intervals and direction. As for the direction, everything is simple:
- horizontal (in other words, it is also called lateral flat).
You can define it visually on the chart. If the price goes up evenly, then buyers dominate the market. They are also called bulls. Why is that? When the bull attacks, it throws its prey up.
If it falls over a certain period of time, then sellers prevail in the market, who pull the price down with their advantage. This is a downtrend (bearish) trend. Such market participants were called bears, because when he attacks, he presses the victim to the ground.
The screenshot above clearly shows how the price for the EUR / USD currency pair goes down. Naturally, she will not move in one straight line. This never happens on the market. Due to the undulating nature of the movement, we observe periodic pullbacks, corrections, breakdowns, and more. But more on that later.
The third phase is consolidation. Or in another way - lateral (horizontal flat). That is, a situation where there is no clear mood on the market, the price does not rise or fall, but as if in uncertainty hangs within a narrow side corridor, which is limited by support and resistance lines.
Consider an example on the same currency pair. As you can see from the screenshot above, the price reaches the upper resistance level, but it does not have enough strength to breakdown, after which it bounces and falls to the support level. But sellers also have no reason to break down, so buyers are again seizing the initiative, as a result of which quotes are again pulling up. And so it goes on exactly until something happens on the market that takes it out of this balance.
So, we figured out the linear forex trend. There is still a classification - by time. In this regard, market trends are divided into:
- long term.
Everything is clear here. Depending on the timeframe you select, the trend will either be short or last for months. At the same time, the same uptrend on the daily chart may consist of several downward short-term trends on the same 15-minute timeframe. Because of this, many beginners experience confusion and common mistakes. Without checking the main trend on the higher timeframe, they naively believe that the current one at 5 or 15 minutes is what it is. And it turns out that traders make a deal against the trend! But in fact it turned out to be only a classic technical correction.
Experienced professionals take the basis of trend trading - a daily chart. Regardless of the fact that the trend can be lasting in a year or short for five minutes.
In general, short-term trading on pullbacks, corrections against the trend is doomed to failure. According to statistics, 70% of transactions concluded in this way are closed in the red. This once again proves that you need to follow only the trend!
On whatever timeframe you analyze the chart, always check the situation for older ones. It is necessary that at least 2-3 charts have the same market trend. For example. Even if the trader has a medium-term trading strategy that works on 1-4 hourly charts. But still, you need to conclude a deal in the direction in which the price goes on the 1-day chart. Otherwise, we ignore such a signal, as it will be against the trend. This means that there is a high risk that the transaction will close in the red. The main task of the trader is to minimize such risks.
One of the common mistakes made by beginners is tunnel vision. That is, they analyze only one graph within one time interval. Remember! The older the time frame, the less often the signals, but they are stronger. It is more likely that the transaction will close in profit.
How to determine the Forex trend using the Price Action methodology
We will start by identifying trends in the market with the most commonplace methodology, where we will not apply anything but the schedule itself. No indicators, lines or other tools. Only the bare schedule! Many pros use this particular tactic and successfully trade for more than a decade.
Already just carefully observing the chart, you can determine with maximum accuracy both the Forex trend and the optimal entry points.
In the framework of the Price Action methodology, the direction of the market is determined by:
- upper maximum and minimum values of the price for the ascendant;
- lower maximum and minimum for the downward.
This is the oldest method for determining the trend in the market, tested for many decades. The foundation of the basics! It has now been invented by a bunch of indicators, programs, robots, automated advisers. Before, there weren’t even interactive charts that show us the change in price for every second!
For example, with an uptrend, each subsequent price maximum is higher than the previous one, the same applies to wave lows. A trend is considered confirmed when the price breaks the previous local maximum. This is the first sign of a trend change. But not a fact. It can both continue and turn back. And this maneuver can be just an ordinary rollback or a false breakdown. Well, how to determine this - this is the main task of technical market analysis!
In theory, everything is clear. In reality, such ideally traced trends are rarely on the chart. A trader may need more than one month or even a year to learn how to clearly determine the moment of origin and decay of a trend.
The market itself is unpredictable and chaotic. Therefore, do not focus on the current trend, since at any moment it can change dramatically to the opposite. A trader must learn to think more broadly and at the same time analyze all possible scenarios.
Now let's see what the situation looks like on the chart itself.
The screenshot above shows an example from the Live chart for the currency pair with the Australian dollar. Visually immediately visible - we have a downtrend. And each subsequent peak is lower than the previous one, as well as with the minimum valleys.
Prior to this, an uptrend was present in the market, which changed into a downtrend. And the moment of change is marked on the chart by a red arrow. As soon as the price breaks the bottom trend line in a downward direction and the candle closes lower, this is the first sign of a shift. But do not rush and immediately conclude a deal to lower. We are waiting for the next candle to close. If she continues the new emerging trend, then it is possible to trade for a fall.
The market does not stand still. Growth is replaced by decline and vice versa. But also do not forget about the horizontal periods of consolidation, which often occur after strong trends. At such moments, the market seems to “rest” and digest the situation. After which the trend either continues, or under the influence of new fundamental factors changes direction.
Trading on kickbacks
In any even strong trend, pullbacks are always formed. In another way, they are also called corrections. At such moments, other market participants are trying to seize the initiative. But they do not have enough strength, therefore, after its completion, the price continues with its new movement its previous movement. As a result, with an upward movement, the previous resistance level becomes support for the price, and with a downward movement, on the contrary, support becomes resistance.
Experienced traders are advised to break deals in the direction of the main trend at the very moment of the rollback completion.
Consider the example in the screenshot above. Quotes began to grow, the first maximum formed. Further, the price rolled back, broke through this level, rose higher. So the second maximum turned out, which is higher than the previous one. So we have confirmed an uptrend in the market. A rollback was quite logical from a technical point of view. And the price rebounded from support, which previously acted as resistance and the first maximum value. After the rebound, a third level of resistance formed, rebounding from which, the price rolled back to its previous support. It is already considered strong, as the price has reacted to it already twice. The greater the likelihood that she will rebound from her into this one, continuing her upward movement. But for this we need confirmation of the signal in the form of indicators or Japanese candles. On the chart, they are just pin bar, which rests in the shadow on the support level.
Thus, the price periodically returns to such rollback zones, which in turn form excellent moments for opening transactions within the framework of Forex trading!
Here is a ready-made profitable trading strategy that does not require any indicators and sophisticated tools for analyzing quotation charts.
Forex Trend Lines
So, the trend is the main key to the success of the trader. The basis of the basics in the market! I already told you earlier how to identify trends using the Price Action methodology without additional market analysis tools.
Now I will teach you how to determine the forex trend using trend lines.
It is very simple. Take two values (maximum or minimum) and connect them with one straight line. On live graphics, there is such a graphical tool, which is called that.
- For the upward movement, the line is drawn below, the minimum values are connected.
- For the downward - at the top, that is, we connect two highs.
The main purpose of trend lines is to determine support and resistance, a channel for price movement. A trend is considered stable as long as it is within its limits and bounces off the trend lines in the direction of its continuation. The more the price rebounded, the stronger this level and the more difficult it will be to break through in the future. But in the event of a breakdown (which will happen sooner or later), the price spurt will be powerful, by a large number of points. On this, experienced traders raise a lot of money for one transaction.
As soon as the price breaks the trend level in the opposite direction, the trend is officially considered completed.
On live chart I gave a good example. The price was above its trend support line, periodically bouncing from it upward. The moment of breakdown I marked with a red arrow. The price breaks the line in a downward jerk and fixes below. This was followed by a rollback to the former support line, which now began to act as a resistance. Well and then there was a change of trend from upward to downward.
By learning to identify such moments in the market, you can become a successful trader and earn huge money thanks to Forex!
In theory, everything is simple. In reality, it is not always possible to connect two points so perfectly and get a clear market trend. The more such points, the more stable it is.
And sometimes it can be difficult to find these two points. On the history of quotes, everything is simple and clear. It’s a completely different matter when you monitor the chart online, when the price behaves erratically as she pleases. And sometimes there’s just nothing to catch on! And here a common mistake of beginners appears - they begin to think out and finish, because the line of the Forex trend should be smooth and beautiful, as shown in the textbook!
The golden rule for constructing trend lines: it is built on two points, and the third confirms it.
In the example in the screenshot above on the Live Chart, the third point just acts as a confirmation.
Now let's talk about the optimal distance at which these lines should be from each other. It depends on the timeframe you choose. Yes, and just the subjective opinion of each trader. This all comes with experience, and in the future you will intuitively define these zones.
One thing is for sure! If two such points are too short from each other, then such a trend is not considered reliable.
The angle of inclination also affects! It is believed that the steeper the angle, the less reliable the trend line will be. And even if it is built on points located at fairly perfect distances from each other. All the same, it’s not a fact that with such a sharp trend, the price will rebound from the level. With strong growth, an equally sharp correction will follow. Therefore, it is better to look for such a forex trend that will be calm and uniform, in the absence of serious events and news on a fundamental background.
Now let's talk about the breakdown. This is the most important part of the technical analysis, which signals the upcoming possible trend change. Above, I have already given a vivid example of this. But there are false breakdowns, after which the price again returns to its previous channel of movement.
How to recognize it? Only with the help of additional technical analysis tools. Well and of course - experience! A trader learns throughout his career, constantly learning something new. Since the market itself is developing and does not stand still.
For effective trading, do not paint your chart with many lines. I have many times cited unsuccessful examples of newcomers who believe that the more indicators they put on the chart, the more accurate the signal will be. Here is an example:
This will not give you anything good, except for the complete mess in your head! The same applies to the construction of forex trend lines:
How to effectively use trend lines for successful Forex trading
First of all, you need to be patient. If you want to earn extra money and conclude frequent transactions as soon as possible in order to quickly get easy money - then you are definitely not here. Here you need to learn composure and calm. Experienced traders can wait a few days to wait for a profitable trade. But then the result will pay off!
Train your observation and scrupulousness in order to better recognize the moments for opening deals when:
- the price bounces off the trend line as on support / resistance;
- makes a breakdown followed by a change in trend;
- false breakdown, which ends and the price returns back to its previous channel.
These are the three main strategies that you need to learn how to trade. And for each of them there are methods for confirming signals. As their recommendation, I study candlestick patterns, graphical analysis figures, technical indicators, Pivot, Fibonacci dots and lines, and much more. Together, this is a huge science called market analysis. Although it is difficult at first, it is very interesting!
When building your strategy, you should pay attention to all the little things, try, test, supplement and remove unnecessary indicators:
- pay attention to what candles formed during breakdowns and in areas of trend levels;
- on what timeframe did this happen;
- whether any news that was published before accompanied this behavior on the market;
- Have you used horizontal support / resistance lines in parallel with trend lines?
- which indicators used, which complement the signals well, and which show false.
All this makes up the general trading strategy, which is honed with time and experience. Well, of course, on my mistakes.
Moving average as a trend line
One of the fundamentals of the market is a rebound and a reversal from the average price. Well, the moving average has remained the most popular and best indicator for determining this for decades. It can also be used to determine trend levels, from which the price will bounce, and continue its movement within the framework of the main trend.
When the consolidation period begins, the price moves in the range around the Moving Average, periodically crossing it up and down. In an uptrend, the line of the Sliding will be located below, and act as a dynamic support line, from which the price will bounce during correction waves.
Forex itself is full of contradictions. But there are also laws to which price obeys. For example, only after passing a certain distance, the price will turn around, rebound, change the trend, and so on. Nothing's happening right now. It takes time to work out the same rollback or breakdown. For this reason, having made a breakdown of the trend line, the price in 80% of cases returns to it again and makes an additional retest. As if making sure that the past trend is completed completely.
Understanding and accepting this factor, the undulating nature of the price movement becomes understandable and logical.
The Forex market is not as simple as it seems. And if this were not so, then we all would have gone by dollar millionaires! For this reason, do not rush to open a deal only on the basis that the price is going up. Another common mistake draining newcomers is a false breakdown. As soon as they see that the price has broken the trend level, they immediately open a deal in the direction of breakdown. And then, with tears in their eyes, they see how she turned around again and returned to her previous trend. But in order to be able to recognize them and distinguish false breakdowns from real ones, auxiliary tools must be used. Exponential Moving Average acts very well in tandem with trend lines and horizontal supports and resistance.
I personally prefer using two lines Exponential Moving Average with periods 8 and 21. This combination allows you to filter out some moments of false breakdowns. If the price has broken through the EMA with the 8 period, then you need to wait for it to reach the line in the EMA21. With a greater degree of probability, it will rebound from it, and the price will continue to move within the framework of its previous trend. It’s just that the price made a deeper correction. This phenomenon is also quite common in the market.
If two EMA lines are inclined in a certain direction and clearly lined up under each other, then this is a sign of a strong and confident trend. Moreover, the greater the distance between these lines, the higher the strength of the current trend.
Many novice traders do not attach any importance to this, but focus more on the intersection of lines, seeing at this moment to open a transaction. This is true, but not the fact that a change of trend will occur, and there will be no lateral consolidation.
It is much easier and safer to trade on the rebounds from these movings in the direction of the current trend, and not wait for its completion when the market is in limbo.
The screenshot above shows the ideal forex trend, which is the easiest way to make money, and all signals are processed as in a textbook. I recommend that you learn to recognize precisely such moments, and not rush into the pool and make deals anywhere.
I hope that the article will help you clearly define the Forex trend and the moments for opening deals. All of the above methods have been personally verified by me. These are the simplest and most effective techniques that experienced pros use.