Even beginner traders know this rule that you should never trade against the trend. But not everyone understands the concept of the trend and how to identify it. This article will take a look at trend trading and its peculiarities.
Definition of a Trend
The Forex trend is basically the price moving in a particular direction during a given period. Suppose there is a clearly defined trend in the market. In that case, it means that most market participants have chosen the direction of their trades or that some large institutional trader has entered the market and is now pushing the price in the direction it needs. When the security (i.e. financial instrument) is rising, it's usually characterized by a bull market —called an uptrend or a bullish trend. A bullish trend is identified by successively higher highs and lows on the chart. A bearish trend, or a downtrend, is characterized by a series of lower highs and lower lows, respectively and occurs when the asset is falling in price.
A horizontal (a.k.a. a sideways) trend is observed during a flat market. A sideways trend means that there's no clear direction in the market. It occurs when the forces of supply and demand are almost equal and the price consolidates "sideways," within a horizontal channel. When the price breaks this channel's border, it usually indicates that a new trend is commencing.
Why it's Important to Know the Current Market Trend
A trend represents the general direction of the price. There is a famous saying among traders - "The trend is your friend." Trading with a trend allows you to minimize the risk of losses and increases your chances for a successful trade. If you can identify the trend correctly, you will be earning more and losing less.
How to Determine the Direction of the Trend
There are several ways to identify a trend. As you gain more trading experience, it gets easier. Below, we'll share a few methods you can use to determine which trend is currently dominating the market:
Look at the trading chart carefully
Sometimes you can quickly assess the direction of the trend visually. It is enough to plot a line through successive highs or lows on the price chart. If it is directed upwards, the trend is bullish; if it is directed downwards, the trend is bearish.
Look at the trading volume
You can predict the trend and its strength by looking at the candlestick's body on the bar chart. If the candle's body is long, it indicates a large trading volume, so the price is likely to keep moving in this direction.
Use technical indicators
The advancement of technologies and the introduction of technical indicators have made a trader's life simpler. Nowadays, you can choose from a great variety of technical indicators that have different functionality. Some of them are used to identify the trend.
Among these indicators are:
1. Moving Average
MA is a great indicator to determine the current market trend. Look at the angle of the MA lines. If the lines are located in an upward direction, then the trend is bullish, and if MAs are in a downward direction, then the trend is bearish. When the MA lines are interlaced, it indicates that the market is flat. The location of the price also helps you identify the trend. When it is above the MA, the market is dominated by the bulls. And vice versa - if the price is below the MA, the market is in a downtrend.
This technical indicator is also often used to identify the trend. If a fractal is formed above the previous one, it indicates the uptrend. If it's formed below - the downtrend. This method is somewhat similar to the visual method.
3. Parabolic SAR
The parabolic SAR is a popular indicator used by traders to determine the future short-term momentum of a given trading instrument. The parabolic SAR indicator is represented as a series of dots placed on the chart either over or below the price depending on the momentum. A small dot is placed below the price when the trend of the asset is upward, while a dot is placed above the price when the trend is downward.
4. MACD histogram
The MACD histogram is a valuable tool that can help you profit from momentum. If the bars are above the zero level and each following bar is higher than the previous one, we can identify an uptrend and vice versa. Also, this indicator allows you to spot trend reversals. For example, when the price makes a new high on the chart, but the next histogram's high is lower than the previous one, it indicates the upcoming reversal.
There are different ways to determine the momentum and the trend, as you can see. If you don't trust technical indicators, you can identify the trend visually - by looking at the chart or using the trend lines. But keep in mind that using technical indicators speeds up the process. Whichever method you choose, the main thing is to follow the rules to identify the price movement correctly. If you pay enough attention to these principles, the trend can really become "your friend."
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