Trend analysis is a type of technical analysis that focuses on the trend to analyze price behaviour and predict future movements. In the Forex trading market, the trend is considered by traders to be their friend, and Wall Street believes you should never go against it.
Forex Trend Analysis Explained
Trend analysis aims to detect and predict price trends. Detecting the trend helps in making trading decisions; you can buy in an uptrend and sell in a downtrend until prices suggest a trend reversal.
Trend analysis is one form of forex technical analysis, that is based on the idea that historic price movements give traders an idea of what will happen in the future. This type of analysis can be applied to any time horizon, whether it is short, medium, or long-term. That’s why it is suitable for different trading styles.
Traders can make profits when they trade along with the trend and not against it.
Types of Trend Analysis
The trend is the general direction in which the market price of an asset moves. Trends are categorized into three types:
- Uptrend (Bullish)
- Downtrend (Bearish)
- Horizontal (Sideways)
There is no specific timeline for a direction to be considered a trend, but the longer the direction is sustained, the more reliable the trend becomes.
How to Identify a Forex Trend
Identifying the Forex Trend is the best way to find an edge in the market and become a successful trader. Even though this is not a forex trading strategy, understanding forex trends will provide you with a solid foundation. Your transition to profitable trading will be much easier if you have a solid knowledge base, as trend analysis is fundamental and could transform your trading to great success.
Trends can be identified using trendlines that connect higher bottoms in the upward direction, lower highs in the downward direction, or convergent highs and lows in a horizontal direction. Let’s go through each Forex trend one by one.
Step 1: Identifying the Upward Trend (Bullish)
An upward trend is a bullish trend in the Forex market. This implies that the price of a currency would continue to increase over time. As a result, there will be higher peaks after troughs and higher troughs after peaks.
A Forex upward trend line is drawn by adjoining two successive low prices and can be validated as a price trend by drawing the straight line between more than two successive low prices. In other words, a trend line will always be drawn below the geometric patterns displayed by price movements on a trading chart.
In trend analysis, you need to be aware of these two things if you want to determine whether a market is in an uptrend. When the price surpasses a peak, it will inevitably cause a new peak to appear. The task at hand is to wait for the market to confirm a new trough, one that is higher than the previous one. At this point of trend analysis, one might be able to describe an uptrend as occurring.
Step 2: Identifying the Downward Trend (Bearish)
In the forex market, a downtrend is distinguished by price declines, usually accompanied by partial consolidations or movements against the prevailing trend. In contrast to an upward trend, a downward trend results in a less rapid rate of change over time and signals the continuation of a downward movement.
When it comes to trend analysis, a downtrend is characterized by a series of lower peaks and valleys in the price graph. A downward trend line in forex is formed by finding two and more consecutive highest highs of the price movement that follows.
As compared to other financial markets, the Forex market is less vulnerable to downturns. Since selling is a common occurrence in this market, price declines are quite unlikely to affect it. Even during financial or economic turmoil, the trade of one currency against another usually means something is going up.
Step 3: Identifying the Horizontal Trend(Sideways)
In trend analysis, a sideways trend is a horizontal price movement between levels of support and resistance. It occurs when the market has no sense of direction and consolidates most of the time. Forex trend analysis reveals that 80% of the time, the market goes sideways, and all professional traders focus on the remaining 20% when the market enters a trend. In simple terms, “When a trend goes up, your profits also go up.”
A sideways trend can be seen as horizontal lines between drops and falls in the exchange rate. Price rises or falls upon the end of the trend, which can last anywhere from a few days to a few weeks. Most often, after a sideways trend in the market, a currency price will move back in the direction that it was before the trend began.
During a sideways trend, currency prices behave more steadily. This provides an ideal entry point for investors who employ targeted strategies. However, traders tend to lay low during a trend that is sideways until a new trend emerges.
Below is a picture showing all the trend direction changes.
The trend line is a charting technique that uses lines to simplify the direction of a currency. While a channel consists of two trend lines parallel to each other. The channel can be used to interpret the support and resistance levels.
Trend line Tips: It takes at least two fulcrum points, highs or lows, to draw a valid trendline and three to be confirmed. Like support and resistance levels, the more the trendline is tested, the stronger it becomes. The reliability of a trendline depends on how steep it is. The steeper the trend line, the less reliable it become.
How to Identify a Change in Trend Direction
A Forex trend has a way of fooling inexperienced traders into losing positions from their winning positions. It is important for Forex traders to be well versed with trend analysis so one can identify a change in trend direction to avoid fakeouts and manage to trade on the right side of trend movements.
Simple steps to identify a change in Forex trend
- Mark the swing high and swing low on your charts to determine the current trend.
- Once a swing low of an uptrend is broken or a swing high of a downtrend is broken, the direction of the forex trend will change.
- A trend change can be easily identified, but it is surprising how many traders get trapped on the wrong side because they don’t understand the concept.
A forex trend indicator is best determined by examining price and observing a change in market structure, as shown in the image below.
The easiest way to find a new trend is to find a trend that breaks a lower high. Depending on your trading preference, you can do this in any time frame. See how lower highs are ramping up into a trend direction change in the image above.
Short term, Long term & Intermediate trends
In the Forex trading landscape, a long term or major trend usually lasts longer than one year. Depending on the nature of the trend, an intermediate or secondary trend can last anywhere from three weeks to a couple of months. While the short or near-term Forex trend is generally shorter than three weeks.
Sometimes, an intermediate trend may represent a correction of a major trend. There may be a series of intermediate peaks and troughs within the intermediate trend itself, each of which can be identified as a near-term trend. For trend analysis, long-term forex trends are best viewed on daily charts, while intermediate trends should be viewed on hourly charts, and short-term trends should be viewed on 15-minute charts.
Trend Analysis Strategies
Most Forex traders usually identify the trend by turning to technical analysis. Technical analysis involves both trend lines and indicators. The following section describes them one by one.
1. Line graph
Most Forex traders read a chart by identifying bars and candles. A line graph is a simpler and more effective way to read a chart. For trend analysis, an easy and fast way to identify the trend direction is to use a line graph instead of bars and candles that provide detailed information. For you to identify a trading trend, this is a good place to start.
2. Highs and Lows
A very easy way to identify a trend is to look at charts for highs and lows. An uptrend in this context means that the price is making a series of higher highs and higher lows.
A downtrend, on the other hand, refers to lower highs and lower lows due to a larger number of sellers pushing prices downward; lows are also low because sellers are selling but there are no interested buyers. No indicators are required for this type of trend analysis. This method is purely based on price action.
Trends lines provide a more graphical representation of market behaviour that helps Forex traders make their decisions about whether to ‘buy’, ‘sell’, or even issue a ‘stop-loss order’ in trading. According to the Dow Theory, market prices always show a trend after discounting several factors like the political environment that affect the market. In this sense, trend line analysis only studies the behaviour of price based on the previous assumptions.
Basically, traders will enter long positions when the price trend is getting up. On the other hand, they sell when prices are getting lower. Trend lines help to identify entry and exit points through support and resistance levels. Another way to use this strategy is to wait for a trend reversal to enter the market. Eventually, any price trend will come to an end.
4. Moving Averages:
A skilled trader can anticipate trends with their honed trading instincts. But for new traders, it is very useful to have an objective method for identifying and confirming trends. It offers new traders the opportunity to learn first and then improvise later. A moving average is one of the most useful tools in this regard.
A moving average is a calculation to analyze data using the average change in a data series over time. It is a common technical analysis indicator. Moving averages help in identifying the continuity of a trend. Usually, traders enter long positions when a short-term moving average crosses above a long-term moving average and vice versa.
5. Momentum Indicators:
Momentum indicators are used to measure the strengths and weaknesses of price trends. Common momentum indicators include the relative strength index (RSI) and moving average convergence divergence (MACD).
The Moving Average Convergence Divergence (MACD) indicator helps traders identify trends by calculating the average price of a security over a specific period. This trend trading strategy is the most effective because it involves several traders entering long positions at a timeframe where the short-term moving average is higher than the longer-term moving average.
Importance of Technical analysis in Trend Trading
The majority of Forex beginners lose money. If you do some research, you’ll be surprised to find that most of them are losing money since they are trading against the trend. Professional traders believe that trading with the trend of the market is one of the best ways to succeed in Forex. If you trade Forex based on trend analysis, you can skip the technical analysis since it’s at the heart of it.
Technical analysis plays a crucial role in trend analysis since it helps determine if and when a current trend will continue. Technical analysis is a method of studying market behaviour to predict future price directions based on price charts. The technical analysis revolves around the premise that all market-affecting factors – fundamental knowledge, political events, natural catastrophes, and psychological considerations – are immediately discounted in market price action. As a result of such events, price movements will immediately follow, whether upward or downward.
By analyzing data, analysts can better predict what will happen next in the market. A Forex trader must be able to recognize price-based indicators, volume-based indicators, and moving averages in order to make an informed decision.
How to learn Forex Technical Analysis?
Several resources can be found online to teach you the basics of technical analysis while you learn Forex trading. You can speed up the process by taking online courses and contacting professional traders. By doing so, you can avoid common mistakes made by newbies.
Understanding the key principles and applying them to a demo trading account is the best way to learn forex trading technical analysis. Another method to learn is to copy professional traders until you are confident enough to trade on your own. In copy trading, a trader copies the positions of a professional trader, either automatically or manually. Learn more on how to Copy Trade with AximTrade.
Trading Trending markets
Trending markets are ideal for swing traders with larger price targets, whereas range-bound markets are more suitable for scalping and day trading where traders seek quick profits with smaller price targets. Trend lines and channels help traders to determine optimal entry and exit levels.
In an uptrend, a trendline is drawn from one particular low and connects the following highs. The line, therefore, acts as a dynamic support line, as you can buy when the price touches the trendline.
The reverse applies on a downtrend, as the trendline is drawn from one high, connecting it to the successive lower high. The trendline here acts as a resistance line, as you can sell when the price touches the trendline.
Forex Trend Trading Entry Strategy
Once you’re done with trend analysis, choosing an entry point will be one of the most important elements of any complex trading position. Assuming everyone understands the forex trend structure now, it is time to begin planning trades. Understanding the setup is a vital aspect of any forex trend trading system. Here are the 5 steps to applying a Forex trend trading entry strategy.
- Identify the direction of the trend.
- Look for key support and resistance levels.
- Find potential entry points either along the trend line between support and resistance areas or along with key support and resistance areas once the trend changes direction.
- Think about all the possible outcomes of the trade, and know when it’s a good idea to do it.
- Execute the trade if the market confirms your trade idea when you have determined the full plan for the trade.
Now that you have a firm foundation on how to identify and trade forex trends using trend analysis. Prepare your plan and analyze the results to determine if trading forex trends is the right method for you.
Check the Forex Analysis and Start Trading
Forex analysis is usually provided by professional traders and market experts who already have solid experience in analyzing the financial markets. Usually, at the beginning of the week or after major new releases, the forex professionals will provide technical analysis on the major pairs or gold and this includes trend analysis and other indicators such as the moving average. Therefore, we help the traders and forex community by providing weekly forex analysis and forex news to help traders to predict the market and as well to learn forex analysis, and enhance their trading strategies.
It is time to start exploring forex trading and to open forex account in a few easy steps with AximTrade. In a market full of opportunities it is important to secure your investment and choose a forex broker with reliable trading conditions and advanced technology. AximTrade is a leading platform with flexible leverage for margin trading which allows top competitive leverage in the market up to infinite leverage. Read the full AximTrade Review for more insights about forex trading with a reliable broker and enhanced forex platform.