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Forex Trends are a key concept to get to grips with when undertaking any form of financial trading and the Forex markets are no exception. The ability to identify forex trends by the use of technical analysis is a key concept that you will need to become familiar with when trading Forex. They provide one of the most reliable indicators of future market direction and offer good opportunities to profit from. They are defined simply as the predominant direction that a currency pair has been moving for a specified duration of time.
An often used expression among Forex traders is ‘let the trend be your friend’. This references the fact that Forex trends, once established, are more likely to continue than reverse.
Forex trends can exist across multiple chart timeframe’s and can occur on any currency pair. They are most commonly classified in one of three ways:
Uptrend – Forex Trends
In an uptrend an a currency pair will rally, often with intermediate periods of consolidation or minor movements against the trend. However the dominant direction of movement will be ‘up’.
The currency pair will show a series of Higher Highs (HH’s) and Higher Lows (HL’s) on the chart.
Downtrend – Forex Trends
In a downtrend an asset declines, often with intermediate periods of consolidation or minor movements against the trend. In a downtrend the dominant directional movement will be ‘down.’
In this instance the pair will show a series of Lower Lows (LL’s) and Lower Highs (LH’s) on the chart.
Nontrend – Forex Trends
Here the value of a currency pair will often swing back and forth for long periods between defined upper and lower limits. There will be no apparent directional movement of the price (HH’s & HL’s or LL’s & LH’s). This is sometimes referred to as ‘sideways’ or ‘range bound’ movement.
Take a look at the AUD/USD Daily chart above. We are able to see that the pair has been moving up and that the existence of a strong upwards trend is in place. The is further confirmed by the price action making a succession of higher highs and higher lows on the chart as the trend advances upwards.
A common way to profit from these market trends would be to enter into a ‘long’ position when the price action pulls back to a projected level of support within the trend.
In the above example, this would mean entering long at the point of the higher lows (blue) shown on the chart. This is called “buying on dips” and is a common strategy used to profit when a strong trend is identified.
A stop-loss order would be placed on each trade below the lowest level that the market had reached on each pullback.
The opposite approach could be used for a market in a downtrend. The downtrend is identified in a similar way to the uptrend, with the exception that the trader is now looking for lower highs and lower lows on the chart.
In the example on the USDJPY below, you would wait for a pullback to a level of resistance (green circle) and then go short in the direction of the downtrend. Stop orders would be placed above the highest point at which the pair traded when pulling back. This approach is referred to as “selling on market rallies”.
The key point to note from this lesson is that by trading in the direction of the dominant trend, you are being backed by the greater momentum of the market and so in a sense, you end up lowering the risk attached to your positions.
It is of course possible to identify trades against the trend. However profits earned in this way will come with a much greater level of risk attached. This is because you are buying against the direction of the market and therefore are in danger of the dominant trend resuming and taking out your position.
Trends in the currency markets will often continue for long periods of time. They can last for days, weeks, months or even years. A longer term monthly trend may contain several shorter term daily or weekly trends within it. As when trading with support and resistance levels, a general rule of thumb is that the higher the timeframe that the trend exists in, the stronger the trend will be.
Being able to spot trends in Forex is a vital part of identifying profitable opportunities to trade. Even short term traders need to be aware of trends when trading.
Make sure that you check for the existence of established trends before trading. When shorter time frame trends start to break down , those running across higher timeframe’s, such as weekly, monthly or even over a number of years are likely to persist.