Trend is one of the most important aspects of trading. A good trader is a trader who is always curious about the current trend.
It is natural to trade based on momentum rather than the other way around. Many traders choose to buy during an uptrend, trying to profit from continued price increases. However, should we always trade in the direction of the trend?
As for the type of trader who chooses to follow a reversal or trade against the direction of the trend.
Then those of you who are just starting out are wondering, what way should you trade?
To answer this question, first, find out what a trend is and how to identify trend in Forex through this Glossary article.
Definition of Trend
Trend is the direction of the market or asset price. Like in other fields, trend can be up or down. In the financial market, an uptrend is called an uptrend, and a downtrend is called a downtrend.
Traders can identify trends using various forms of technical analysis, including trendlines, price action, and other technical indicators. Trend lines can show the direction of the trend, while the relative strength index (RSI) is designed to show the strength of the trend over a certain period of time.
An uptrend is characterized by an overall increase in prices. Nothing goes up vertically over the long term, so oscillations can always occur, but the overall direction must be higher for it to be considered an uptrend. The most recent swing low must be above the previous swing low, and the same applies to the swing high. Once this structure starts to become unclear, the uptrend could potentially lose momentum or reverse down/downtrend. The downtrend itself consists of a lower swing low and a lower swing high.
When the trend is up, you may think the trend will continue until there is a point that indicates the opposite. This assumption can be identified with a lower swing low or lower swing high, price breaking below the trend line, or technical indicators showing bearishness.
When the trend is down, most traders choose to sell or short. The goal is to minimize losses (get profit) from falling prices. Most (not all) downtrends will reverse, so as prices continue to decline, more traders begin to see price positions as bargaining opportunities and enter to buy. This can lead to a resumption of the uptrend.
Trend is also used by investors who tend to fundamental analysis.
This analysis includes observing changes in revenue or other business/economic metrics. For example, earnings per share trend metrics and revenue growth. If revenue has grown over the last four quarters, it’s a positive trend. However, if revenue has declined over the past four quarters, the trend is negative.
There is also a condition where there is no up or down movement called the trendless period.
Identifying Trend in Forex Market
The trend in Forex occurs when the price of a currency pair moves in an identifiable direction over a certain period. Many traders identify Forex trends using the following indicators:
The moving average of the price of a currency pair is one of the most commonly used trend indicators. A moving average is the average of the prices of a particular currency pair that change over time. For example, the five-day moving average is the average of the last five days. On the sixth day, the first day is crossed out of the average calculation. If the moving average is up, the market trend is generally up, whereas when the moving average is down, the trend is usually down.
Moving Average Crossover
A crossover occurs when the short-term moving average of the price of a currency pair rises above or falls below the long-term moving average of the price of a currency pair. For example, if the five-day moving average of the price of a currency pair crosses above the 20-day moving average of the price of a currency pair, an uptrend may occur.
The price of currency pair will fluctuate throughout the day and will create highs and lows. When the high price of a currency pair is above the previous day’s high, it creates a “higher high.” When the market price when the currency is lower than the previous day’s low, it creates a “lower low.” The higher high of the currency pair combined with the higher low of the currency pair can also indicate a Forex trend.
For example, if a currency pair makes three consecutive higher highs along with consecutive higher lows, an uptrend is likely to be strong. Three consecutive lower lows, along with three consecutive lower highs, indicate a downtrend.
Combination of Techniques
You can also read trends by combining two techniques. The combination of successively higher moving average levels with moving average crossovers can confirm that an uptrend is occurring. You can also combine price action and moving averages. For example, a consecutive higher high along with a moving average that is rising can confirm an uptrend.
This is just the beginning of a topic about trends, but you already have enough insight to go further. Most importantly, never stop learning.