Trend traders talk about using indicators to recognize possible trends, which can save a lot of time, but seeing a trend with your naked eye goes a long way when you're looking at dozens of symbols every day. This article is for traders who are still learning the ins and outs of setting trades that perform well. If you’re new to technical analysis, consider this a very simple introduction that you can build on. Such a foundation can later support the use of technical indicators and much more. Let’s get started.
Spotting a trend
Trend traders are always on the lookout for signs that a price will continue on its course. Many experienced traders believe that trend trading is the safer way to go, but you need to be able to see the signs. The concept is to go with the flow. If the price is rising, it will continue to rise until something upsets the balance. The theory is logical, but just what signs are trend traders looking for?
Higher highs and higher lows (rising prices)
So you are looking for a rise or fall that has the strength to keep going. While pro traders use technical indicators to confirm theories, they must first recognize the presence of potential. Prices almost never rise in a straight line. They spike up, crash down, and often create the jagged mountain range that is synonymous with trading. Professional market analysts call the peaks higher highs. In contrast, the higher lows are the valleys or lowest dips within the rising trend.
Take a look at this chart. To the left, we have some ambiguous noise, but no clear trend forming.
After a long dip in the middle the price rockets up, but is that a trend forming? Let’s find out what analysis suggests. We start by drawing a line from the start of the trend to the first high.
If you continue the line (green) it will not meet the next higher high. The direction is shifting and a new course (blue) needs plotting. Note that the blue line again doesn’t meet the next higher high, suggesting that momentum is fairly weak.
The higher low tells a similar story. The short high-low trend (red) loses momentum, then a spike, then the lows start to get lower relative to highs (orange). This is not indicative of an upward trend. Neither buying nor selling would be an attractive option for an experienced trader. Take a look at what happens next.
As you can see from the chart, the trend did not continue. As momentum faded, price retraced and a new, smaller downward trend began.
Note: If you want to trade a downward trend, the principle works the same. Simply draw a line along the lower highs and lower lows. These lines usually take into account more than two lower highs. The more the better, but don’t wait too long. Positive sentiment won’t last long.
The most important part
Technical analysis is a great way to confirm theories, but it should not be the only consideration when making a trade. There are many factors influencing prices, including political and economic news. Before you commit to a trade, make a full investigation. If all signs point to the same conclusion, then trading conditions are as good as they will ever get.
Top tip: once you’re familiar with ‘naked’ charts, start looking at indicators. Moving averages (MA) and the relative strength Index (RSI) should be the first two to consider.
Open up your charts and start adding lines over the next few days. Sit back and wait to see whether your forecasts and conclusions are accurate. If you’re right more than you’re wrong, you can think about making real trades on the foreign exchange market. Soon you won’t even need to add lines!
Get full access to trading tools and the forex market.
Not sure how to get started? No problem. Follow this step-by-step guide.