At the end of the day, successful forex trading comes down to spotting the right trend, and exploiting it at the right time. Many rookie traders, even when they are put in front of a very obvious trend, make the grave mistake of always betting against the trend (going short), hoping to get rich overnight.
Nobody is saying you should always go with the flow. But learning how to spot them and actually understand them can help you build better long-term strategies. Without further ado, here is how to stop forex market trends and actually understand them.
The Different Phases of the Market
Before learning how to spot trends in time, one should have full knowledge of what exactly they are looking for. Essentially, markets can do one of three things: go up, go down, or move sideways. Before saying ‘’that is simple, why am I reading this again’’, there is a catch: how fast, or how long the shifts last, changes all the time. So, you need to take this into account before making any move against the market or riding the trend tide wave.
Now let us talk a little about the visual representation of these price changes. While most traders use candles and bars when it comes to charts (which is fine), there are other equally viable ways to do this. We are referring to what experts call ‘’line graphs’’. While candles and bars can provide some very specific information, line graphs can help you spot trends without all the noise and clutter of candles and bars.
Highs/Lows and Head/Shoulders
Another way to learn how to spot trends is familiarizing yourself with the concepts of highs and lows and head and shoulders. Essentially, highs and lows describe everything that has to do with market patterns and chart formations. A head and shoulders pattern is made of highs and lows.
To better understand how head and shoulders patterns work, imagine a line on a chart that takes the shape of a head and two shoulders. This is exactly how a head and shoulders pattern looks, and it acts either as a reversal or a continuation of a pattern.
Understanding Channels and Trend Lines
Channel and trend lines can not only help you identify the presence or direction of a trend, but also understand the market, as a whole, better. While moving averages are great for identifying trends as they are forming, trendlines are best suited to later stages when one needs two, or better yet three touch points to draw a trendline with accuracy.
However, it is worth mentioning that while trend lines are pretty accurate when it comes to spotting a forming trend, they are much better at spotting shifts of already established trends. For instance, if a trend line breaks as a strong pattern is on-going, one can safely assume that the market is ready to shift towards a new trend.
In this scenario, traders can resort to trendlines to spot the breakout points, meaning the moment when the price reenters the trending mode. Trendlines can also be combined with moving averages, as the mathematical principles behind them are quite similar.
One of the most useful trading tools to identify the market direction has to be the moving averages. A moving average is described as a succession of averages derived from successive segments of a series of values (in our case, prices). There are two types of moving averages: simple moving averages, which are based on calculating the simple average of a given security over a predetermined of time, and the exponential moving average, which are focused more on recent prices.
The moving averages, combined with a reliable market radar to track price movements and hear the latest market developments, are great for anticipating the direction in which the market is heading. This is possible thanks to the fact that it takes into account both recent and long-term prices and puts them into perspective. However, there are a few things to take into account in terms of analyzing trends with moving averages:
- Slow moving averages might give signals when the trend had already passed.
- The length of the moving average can affect the time when you get a signal about the market turning into a specific direction.
- Small moving averages can give a lot of false positives, most of the times because it reacted to moving prices too soon, when there is no trend per se to speak of. On the opposite side of the spectrum, fast-moving averages can get you out too early.
Spotting trends as they are forming and identifying the breaking points during which the market is shifting in another direction are two essential processes that all forex traders must familiarize themselves with. Moving averages (both simple and exponential), channel and trendlines and understanding the phases of the market are only a few elements of the trend-spotting process, but they are enough to get you going if you have just gotten your feet wet. Make sure to study these things, and soon enough you will learn how to spot trends with no issues whatsoever.
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Founder Dinis Guarda
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