Trends in Forex Trading are divided into three major categories. They can be either long-term trends, intermediate trends or short-term trends. Understanding how to use these different types of trends to your benefit will make them your friend. Being able to identify a trend and which category it belongs to will serve you well in your Forex Trading.
The Forex market is driven by trends in macroeconomics, and these often take years to establish. The best use of these trends is to help you make long term projections. Traders often check the strength of a trend using a combination of three moving averages. A moving average is when the total of the trades is divided by the number of trades and this gives you an average price for the trades.
The purpose of using three moving averages is that you can determine if this is in fact a useable trend. The first thing to look at is the long term perspective and the short term perspective so that you can see if the trend will be useful to you in your trading.
It is unlikely that a trend will be the same in the short term and the long term. There are currency pairs which look great in the short term and you will see that in the long term they will not be a good investment and vice versa.
Some recommend instead of moving averages, to look at the raw price action. This can be the most effective and simplest way to identify trends in the Forex Market. Watch for patterns in the market. Look for points at which the highs stop and the lows stop. This means that you can identify when the currency pair is on an upswing whether it’s likely to go higher or not and the same with pairs on a low swing. If you are aware of when the market starts to change, you can see how often it changes and in which directions.
Trending financial markets make strong changes and then self regulate. When the market changes direction strongly you can make money but then if you do not get out fast enough you might just lose it again. If you identify what part of the trend you are in, you are more likely to be able to predict its direction and when the regulating period will be.
When a particular part of the market is on the way up it will have small dips along the way and that is what you have to be on the lookout for so you buy during those dips and aren’t selling at that point. If you are aware that trends move in spurts, going up and then stalling, or going down and stalling similarly. When you are careful to watch and see which point you are at in the trend, find the optimum point and use it to your advantage. Then trends will be your friend.