Although many traders try to complicate the process of identifying a trend in the forex markets, the process is actually quite simple.
The key to identifying a trend is to establish whether a currency pair is making higher highs and higher lows or lower highs and lower lows. If the price of an instrument is creating higher highs and higher lows, then it is evident that this is an uptrend.
However, if a particular currency pair is making lower highs and lower lows, then this is evidence of a downtrend. If the price of a financial instrument is stuck in a sideways trading pattern, then this is a sideways trading range.
Identifying Trends Using Line Charts
Although many traders use candlestick charts to do their analysis, it can often be prudent to use a line chart when trying to determine the primary trend of a particular currency pair. Line charts are helpful because they eliminate most of the noise pertaining to price movements, simply plotting the closing prices of an instrument over a given timeframe.
Using Moving Averages
Moving averages are popular among traders as they are a useful indicator of the current trends of a financial instrument. Some of the more popular moving averages include the 9-day exponential moving average (EMA), the 20-day MA, the 50-day MA, the 100-day MA, and the 200-day MA. These moving averages cover different timeframes, starting with the short-term 9-day and 20-day MAs, followed by the mid-term 50-day and 100-day MA, and finally the long-term 200-day MA.
During an uptrend, the price charts of a currency pair will typically be above the respective MA depending on the timeframe chosen. During a downtrend, the price chart will usually be below the MA and will bounce lower once it hits the MA line. During a sideways range, the MA will typically be positioned midway along the price chart, indicating that the price has not yet broken out of the established trading range.
Identifying Trading Signals
Some of the more common trading signals based on price movements include the bullish and bearish pin bars. These key signals to watch for as a trader when analyzing price charts to determine whether the existing trend will continue into the future.
For example, a bullish pin bar usually indicates that the uptrend is still intact, while the appearance of bearish pin bars could indicate the beginning of a downtrend. There are numerous other trading signals that traders should also be aware of when analyzing price charts.
Changes In The Direction Of The Trend
The simplest way to identify a change in the direction of a trend is to watch for a series of lower lows and highs when the existing trend is an uptrend. The opposite is also true for the change in direction of a downtrend where you need to focus on identifying the emergence of higher lows and higher highs, which could indicate the beginning of an uptrend.
However, one of the best ways to truly know if a trend has ended is to plot two moving averages such as the 9-day EMA and the 50-day EMA. Each time the two moving averages cross over each other, typically you can expect to see a change in trend direction.
A Word Of Caution
Despite your best efforts as a trader to identify the prevailing trend in the price of a particular financial instrument, there are no guarantees that a trend will remain in place, or that the price will continue in the expected direction. In some cases, even after in-depth analysis of the price charts in order to identify the dominant trend, the markets will still move in the opposite direction.
This might not be due to an error in your research and analysis, but is evidence of the random nature of the forex markets. If the market moves against you, despite your prior analysis, it is crucial to go back and analyze the trade in order to identify what you might have initially missed. Remember to always trade with money that you can afford to lose.
Identifying the trend is one of the most important aspects of becoming a competent trader. The above guidelines are a good place to start when learning how to correctly identify trends in the forex markets.
The most important step for beginner traders is to open a demo account with Exness where you can practice identifying trends and making trades based on your analysis of the prevailing trends. This will help you hone your trading skills before opening a live accounts.