Even if your strategy is not based on trend trading, you will need basic knowledge in this area to understand the current market situation. Today I will provide you with basic information on trends, which you can then apply to successful trend trading.
The Main Types of Trends
There are several criteria for classifying trends. We will take a look at two main ones: by direction and by the time of existence.
There are two main kinds of trends based on their direction:
- Upward or bullish - growing highs and lows
- Downward or bearish - descending highs and lows
However, the direction of the trend is not always clear. More often the price moves in a range or hardly moves at all. This state of the market is called flat, and most currency pairs stay in flat most of the time.
By the time of existence, trends can be divided into three types:
The most suitable trend for trading is the long-term trend, as short-term ones can quickly change their direction.
Moreover, trends can be strong and weak. Usually, you can determine it by the angle of inclination to the X-axis. An indicator of 35-55 degrees tells us that the trend is strong. If the angle of inclination is lower than 35 degrees, then the trend is weak and can change its direction or go into flat any moment.
How to Determine a Trend?
Basically, a trend is the main direction of the price movement of a particular currency pair. The main trend is usually determined on charts with a bigger timeframe - daily and weekly. Since the price from time to time changes its direction for short periods of time, it would be extremely difficult to determine the main trend on the charts with a smaller timeframe.
You can almost always accurately determine the direction of the trend if you notice growing or descending highs and lows on charts. If in the interval of 100-200 candles you see that highs and lows are growing, then the trend is upward. If the highs and lows are going down, then the trend is downward.
If you take a look at the chart above you will notice that highs and lows are growing which means the main trend is upward or bullish.
Not every market situation is obvious. If you find it difficult to determine the trend, switch to another instrument until the situation on the current one becomes more clear.
How to Know the Trend Will Change?
There are several ways to do this, but these two are the most common ones:
- Consolidation below or above particular levels (support, resistance, moving average - MA 200)
- Change in trading volumes - during the downtrend, the trading volumes are reduced; during an upward trend - the volumes grow. If this ratio changes, then most likely the trend will soon change its direction.
Understanding and right using of techniques described above usually come with experience. Novice traders often use indicators that automatically inform them of an imminent change in trend.
How to Trade on Trend?
In order to delve a little into trend trading, we would need a separate article. But since we are talking about trends in general, it is worth mentioning how such strategy usually works.
The main principle is quite simple:
- During uptrend - buy from the support level
- During downtrend - sell from the resistance level
Trend trading is not a win-win strategy, just like any other strategy on Forex. But on the basis of this style, there are many quite profitable strategies, one of which will most likely suit you.
I hope you find this article helpful. Next time I will tell you more about the techniques used during trend trading. Stay tuned.