“The trend is your friend, until the end when it bends” – this old saying about Forex currency pairs is still applicable even in this new era of trading. A trend, even a small move of price from one price to another one can lead to losses or profits. These trends are actually triggered by four factors. These factors are international transactions; supply and demand; speculation and expectation; changes in the policies of the government and international transactions.
How To Detect Trends in the Market
There are different ways to detect the trends of currency pairs in the Forex market. These methods can also be applied not just in Forex trading but for other markets as well. But for now, let us focus our attention on its uses in Forex. Always remember that this is just part of a larger process like swing trading chart patterns. No matter the type of strategy that you have, always remember to backtest it first and see if it is promising or not.
Spot the Highs and the Lows
The first method that you are going to use can be identified even with the naked eye. Spotting the “higher highs” and “higher lows” is the first strategy that you are going to use. If you become bearish of the currency, you will see a downtrend which will be “lower highs” and “lower lows”.
Important points to remember: The first step when learning to find a trend is spotting the lows and the highs. The process is very direct but this is not considered the best method that you can use to spot trends.
Use ADX When Identifying a Trend
ADX stands for Average Directional Index. It is a momentum indicator that is being used to determine the trend strength. It was first developed by Welles Wilder, which indicates that if the value goes above 25, it signifies a strong trend. But for instances in which the ADX value reaches below 20, then this signifies that the trend is weak, or there are actually no trends at all.
ADX is composed of 2 indicators – the Positive Directional Indicator (+DI) and the Negative Directional Indicator (-DI). When a crossover happens between these indicators, a signal to open a trade is being raised.
Important points to remember: Although the ADX is considered a great means of measuring the “strength” of a trend, you can also utilize it in detecting any early stages of relevant moves. You can do so by implementing a crossover of +DI and –DI.
Use Single Moving Average
Another way to spot a trend in Forex trading is through the use of Mas or the Moving Average. One way, and probably the simplest way of using it is through the indicator placed on the chart. What happens is that, when a price goes above the MA, the currency pair is considered to be in the uptrend. But if the price stays below, the currency pair is in the downtrend.
The important point to remember: Mas are considered to be lagging indicators. They are being calculated “after the fact”. Just like in ADX, you can also utilize Mas in conjunction with other indicators.