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The Trend is Your Friend

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1The Trend is Your Friend Empty The Trend is Your Friend Tue Nov 10, 2015 7:36 pm



Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

Although this may seem pretty basic, being able to identify when a pair is in a trend and when it isn't will help you to increase your chances to profit
consistently in the Forex market.

When you can identify a trend, you can estimate what direction the rate of a currency pair is going to go in. You should exploit the direction of the trend you identify by placing a trade in that direction.

If it’s an uptrend, meaning that the rate is increasing, buying the currency pair will give you a better probability for profit. If it’s a downtrend, meaning that the rate is decreasing, selling the currency pair will give you a better chance of making money.

How do I identify a trend? What are the characteristics of a trend?

The simplest way to identify a trend is through the distinct patterns that the price forms. These can tell you if the market is moving in an uptrend or downtrend.

Identifying a Forex Trend

When a trend is taking place in a Forex pair, the price movements start to form peaks and valleys in the chart of that pair, which are easily identified.In an uptrend, the price movements form a series of higher peaks and higher valleys.

(Higher Highs and Higher Lows.)
Since a picture’s worth a thousand words, lets look at the following chart: This chart suggests that the trader should buy the currency pair (and close the trade by selling at profit after the rate rises).

In a down trend, the price movements form a series of lower peaks and lower valleys: (Lower Highs and Lower Lows)
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This chart suggests that the trader should sell the currency pair (and close the trade by buying at profit after the rate declines).

It’s important to note that during some trading days the trend is hard to spot, some trading days show no trend (the price movements form a Range), and of course you’re bound to run into the occasional reversal, so this is not a perfectly accurate or 100% reliable indicator for trading.

Here is what a trading Range looks like:
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It is easier to make predictions with a trend than with a trading range. While you can still profit in trading ranges, you have to be more nimble on your feet, and ready to jump in and out of the markets at all times. Needless to say, this makes
the trader’s life a lot tougher and the risk for loss greater.

Trading ranges can be really messy and unpredictable, which is why you should always look for trading trends. It’s a good idea to stay out all together during a range, and get back in only when the markets start to trend again.

As a general strategy, it is best to trade with the trend rather than against it, meaning that if the general trend of the market is headed up, you should be very cautious about taking any positions that rely on the trend going in the opposite direction.

The trend spotting strategy assumes that the present direction of the price rate will continue into the future. It can be used in three main time‐frames: short, intermediate and long‐term, with the trends being different for each.

For example, here’s a possible scenario in the Forex market:
Over the last 12 months the trend for the EUR/USD is an uptrend, over the last 30 days the trend is a downtrend, and over the last 24 Hours (intra‐day) trend is an uptrend.

Regardless of the chosen time frame, traders will remain in their position until they believe the trend has reversed.So the goal is to spot a trend that you believe in and trade according to it.
Needless to say, you will need to monitor the trade, in case you were mistaken and the trend vanishes or reverses. Then it's time to cut your losses by closing the losing trade or by reversing ‐ closing the trade and opening a following, opposite trade.

Warning: Speculating on Forex rates involves great amount of risk. Be advised that even the most sophisticated traders can't always predict market movements' directions.

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