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Strategies

How To Identify Trading Trends In The Forex Market.

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As the most traded market in the world, the foreign exchange, or forex, market is traded actively across multiple time zones. Indeed, when a currency is exchanged against another, an investor is trading based on price fluctuations and market sentiment.

The exact extent to which a forex trader makes a gain or loss is dependent on any positive or negative movement in the exchange rate. Essentially, these movements, when grouped together or viewed over a period of time, form trading trends.

What are Trading Trends?

Trading trends can be simply defined as the general price direction of a market or asset. It is based on the concept of analysing historical data and price movements, with the goal of forecasting what might happen in the future.

It is a strategy that uses technical indicators to identify a particular market movement or momentum, and relates to the premise that the markets have an element of predictability. Trading trends are important, as they ultimately have a bearing on how successful or effective a trader is when making their market move.

Main Types of Trading Trends

  • Uptrend

An uptrend, or bullish trend, describes a price movement where the overall direction is an upward or positive one. It generally features continuous and regular peaks and troughs that are higher than the previous ones.

  • Downtrend

Also known as a downward, or bearish trend, it refers to a price action that moves lower as it fluctuates over time. Contrasting with uptrends, it is characterised by peaks and troughs that are lower than the previous ones.

  • Horizontal trend

Otherwise called a flat or sideways trend, it is where the price moves without any clear path of direction – either upwards or downwards. These trends are usually chaotic in nature, and tend to occur when the forces of supply and demand are almost equal.

 How to Identify Trends

Trading trend strategies help traders to identify forex trading trends as early as possible, before any potential price reversal occurs. For instance, in all strategies, a stop loss method should be used, in order to manage risk. Each specific strategy features both technical indicators and price action methods to assist traders in their search for trend trading opportunities. 

Traders often use a combination of more than one strategy, but the three most popular trend indicators are: moving average (MA), relative strength index (RSI), and average directional index (ADX). 

Moving averages

As one of the most commonly used indicators, a moving average is a simple calculation used to smooth out the price data over a certain period of time by constantly creating an average price. 

It is a customisable indicator, meaning a trader can self select the desired time frame when calculating an average. The shorter the time period, the more sensitive the indicator will be to price changes of any kind, while longer time spans will feature an average that is less sensitive.

The main aim of this indicator is to mitigate against random or short-term price fluctuations of a stock.

Relative strength index

This is an indicator that is used to track signals of bullish and bearish momentum by measuring the extent of recent price changes. It allows traders to evaluate the overbought or oversold conditions of a stock or asset price.

The relative strength index is typically displayed as an oscillator, meaning it is made up of a line graph that moves between two extremes. 

Its primary function is to help traders gauge the future direction of a market and to figure out whether there is an accelerating or decelerating momentum.

Average directional index

Traders can use this indicator to determine the strength of a trend, in whichever directional movement, either up or down.

The average directional index uses positive and negative directional indicators, in addition to the trendline, which are both momentum indicators that determine trend direction.

The ADX line varies on a scale from zero to 100, with the strength increasing as the numbers get higher. For example, values from 25 to 100 indicate a strong trend, while values below 25 indicate a weak trend.

Key Takeaways

For any trader looking to enter into long or short market positions, the process of identifying forex trading trends is an important one to follow. It can at first seem overly complex, but once a trader starts with the basics, prior to delving into the specifics, it is relatively simple to follow and implement. 

It can form a central part of any trading strategy, as it enables the gathering of clues, in terms of the insight that the past and present can give about the future. 

Moreover, it gives traders the opportunity to identify and analyse trading trends with a high degree of accuracy, therefore helping to reduce trading risk. 

Predicting exactly what is going to happen in the future is not the job of a trader. However, by best utilising each available resource to gather as much data as possible about previous trends, traders will be better placed in their quest to make the right market move.

*Trading incurs a high level of risk and can result in the loss of all your capital.

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