Spotting trend changes on the Forex is not rocket science. Many traders try to use technology and various tools to help them spot trend changes, but if they use too many they may be getting conflicting or inaccurate results. Using too many tools to identify market trends can be problematic because each of these tools may have a different reaction to price action. One tool may be predicting a spike while another is pointing toward a tight consolidation gap. Too much information can get confusing and the trader gets lost in the weeds.
To begin, in Forex a trend is defined as the direction, tendency or course of the financial market. Following currency trends and making the right predictions on price fluctuations is how Forex traders make their one money. When they can predict the right changes to a particular currency, they buy low and sell high.
Upward or bullish trends are defined by a series of higher lows and higher highs. Conversely, a downward or bearish trend consists of lower lows and lower highs. Most traders can watch the Forex charts and identify when a currency pair is trending one way or the other. It becomes a little more complicated when there is sideways movement. When this happens, the market is not forming a clear series of highs and lows. Instead, it stays consistent around a particular level.
Forex traders not only look at trend lines but also at these lines within certain time frames. Choosing the right time frame is important so that the trader has an accurate picture of how the currency pair is performing. For example, if a trader wants to identify an intra-day trend, they will look at the day’s trading charts instead of a weekly or monthly charts. If, on the other hand, a trader wants to take a longer term view, they will then look market moves over months or even years. Individual traders and dealers may have their own definition of what defines short-term, long-term, intra-day, etc., so defining the time frame is somewhat subjective.
A trader can also use trendlines and moving averages to help them identify a specific trend. The moving average will move as the market trends move. If a moving average is rising, the trend is upward. If the line is falling, then the trend is downward. It may be easier for some traders to identify a line which is rising or falling rather than trying to determine if the market is rising or falling.
Traders may also want to watch the trend strength which measures how strong a trend may be. This can be done by measuring the angles of the trend line. Larger angles mean stronger trends and smaller angles mean weaker trends. It is also possible to measure the strength of a trend by measuring the duration of the pullbacks. A pullback is how fast the price resumes after a trend correction.
Watching and analyzing trends on the Forex is one of the better ways for a trader to predict currency movement. They can then make their trade orders based on their best prediction.