Forex traders can access a variety of analysis tools to track Forex movements, but one of the most reliable and easy to use is basic trend analysis. When you employ simple tactics of analysing swing high and lows you can make informed judgements on a developing trend.
Informed trend analysis is a critical part of successful trading. This article will give an introduction to identifying and trading trends in Forex.
Simply explained, a Forex trend is a discernible price behaviour that shows an overall rise or fall in price. A currency pair is said to be trending when it is rising or falling over a period of time. As you would expect there are two types of trends that can be tracked – a bullish trend and a bearish trend.
A bullish trend occurs when the price movement can be charted for higher bottoms and higher tops. During a bullish trend the trend line will connect the price bottoms on the chart. When tracking this movement, we can typically expect the price to bounce in a bullish direction within the high/low markers of the trend line.
The reverse applies with a bearish trend, wear the trend line will connect the price tops on the chart
When the price breaks through the trend line it is called a price breakout.
When you can identify emerging trends or the continuation of existing ones, you can take steps to trade profitably.
The key is to be able to accurately identify a trend. Many traders will tell you that the trend is your friend and with good reason.
It is worth repeating at this point that identifying the top and bottom points of price fluctuations. These tops and bottoms are the signposts in every trend chart. If the tops and bottoms are falling there is a bear trend, if the reverse applies, there is a bull trend. As traders we are not concerned with the trend direction, we are simply concerned with identifying the trend.
Any two points on a chart can be connected with a trend line. It is when a third point appears on the line, that we can see a tendency. It is then possible to build a trading strategy based around the identified trend.
The price bounce from this third touch will either confirm the trend or provide evidence of a price break out.
Trading volumes give an indication of emerging trends. Often, a Forex pair will begin to trend following an increase in trading volumes. Impulse trends will generally emerge within high trading volume periods while price corrections will occur in lower trading volumes.
While trading volumes are indicative of emerging trends, there is no centralised exchange in the Forex market, meaning that you are reliant upon data provided by your Forex broker.
Identifying new trends and the maturity of existing trends is a key plank in a savvy Forex trader’s strategy. Proper trend analysis gives clues to future short term price movements.