how-to-idenify-a-trend

When trading forex, knowing how to identify a trend is very crucial.

The market is said to be trending when it is moving predominantly in one direction.

The market can trend either upwards/bullish or downwards/bearish.

If you try to fight against the trend, you may end up making unnecessary losses and it may become difficult for you to achieve a good risk to reward ratio on your trades.

You should have reliable ways to help you identify trends since it’s still possible for the market to move in a range, in which it is not predominantly bullish or bearish, but it makes a sideways movement.

You should also learn to determine when the market is potentially moving out of a trend.

Consider a situation in which you are trading a market that is in a bullish trend.

Your focus in this case will be on buy positions.

However, the market begins to move in a range.

Suddenly, your “edge” will be gone.

Being able to identify trends and ranges can be a daunting task when you are looking at live charts, but it should not be that way.

You must have heard some traders say…

“The trend is your friend.”

Although this is true, the trend will only be your friend if you can identify it properly.

The good news is that there are simple ways that you can use to identify a trend.

In this article, I will be showing you these methods as well as the ones that are not very good at all.

Let’s start…

How to Identify a Trend

Technical analysts have devised many ways that traders can use to identify trends.

Some traders look at how moving averages are interacting with each other, some rely on technical indicators that were solely developed to be used for identifying trends, while others, especially the experienced forex traders, rely on the price action alone.

It is rare for the price of a forex pair to move straight up or down.

Instead, forex pair prices move up and down in a stair-step fashion.

In other words, the prices move up and down and up and down but finally manage to move higher or lower.

Whenever a forex pair price moves down and then begins to turn around and move back up, it will create a new low or a valley.

You can then use the highs and the lows, or the peaks and the valleys to determine the trend.

First know what Trend you are looking at

Before you can dive in and identify the trend, it will be of utmost importance for you to first know what trend you are looking at.

By this, I mean the timeframe that you are looking at.

This is of great importance because markets may show different trends depending on the timeframe that you are looking at.

This may confuse some traders, but it should not.

Consider a situation where you have a bullish market on a daily timeframe.

So, the market is moving up.

However, the trend can be bearish on a 5 minute timeframe.

The reason is that although the overall trend is bullish on a daily timeframe, the market can be bearish or falling on an individual trading day.

That is how financial markets move.

They rarely move straight up or down.

This is important because after you have identified a market as Bullish on a daily timeframe but you are trading on a 5 minute timeframe, the trend you are looking at may have no relation to the price action on the 5 minute timeframe.

If the market was bearish on the lower timeframe of that day, you may end up suffering multiple losses.

It is important for a trader to identify a trend, but the trader should also be able to relate the trend to his trading.

For example…

You may identify a market as bullish on a daily timeframe, then you wait for it to make a pullback into important support levels that you consider to be areas where buyers are most likely to jump into the market again and continue the trend.

When this happens, you can drop down onto a 1 hour timeframe and begin to look for buy positions that fit with your trading plan.

That is the best way for you to align yourself with the market trend.

Consider the chart given below…

how-to-identify-a-trend

The above chart shows a USD/CAD forex pair in a downtrend between July 2020 and September 2020.

The downtrend has been shown by the red line running downwards on the chart.

This line is the trend line.

The price never managed to break upwards through the trend line through the entire period of the downtrend.

The buyers were trying to push the price of the forex pair upwards but they were overpowered by the sellers.

This means that the downtrend is very strong.

The following chart shows the behavior of the same forex pair on a 15-minute timeframe…

Identify-a-trend

The above chart shows that the price of the USD/CAD forex pair was in a bullish trend between 25th Aug and 26th Aug.

However, the daily timeframe shows that the price of the forex pair was in a bearish trend between July 2020 and September 2020.

So, we have two opposing trends on the same chart.

The timeframe is a very important factor when you are trying to identify a trend.

The above example confirms the fact that the market can show different trends based on the timeframe that you are considering.

In the example, the overall trend is bearish on a daily time frame.

However, we had two days during which the price of the pair was in a bullish trend.

You can see this in different terms…

A football team can be dominating a league and climbing the table, which is equivalent to a bullish trend.

However, the team can stumble and make losses, which is equivalent to a bearish trend.

So, the team will not move straight up or straight down.

This means that the concept of the forex market never trending completely upwards or completely downwards is also applicable in real-world scenarios.

Identifying Uptrends

A forex pair is said to be in an uptrend when it is making higher highs and higher lows.

For example…

If a forex pair moves up $1.00, then down $0.50, then up $1.00 and then down $0.50 again, it will create a series of higher highs and higher lows.

When the market is making an uptrend, it means that the price of the forex pair is increasing.

Such a market is referred to as a bullish trending market.

An uptrend is an indication that the buyers/bulls are currently controlling the market.

As the buyers keep on buying the forex pair, its price keeps on rising.

Consider the chart given below…

how-to-identify-and-uptrend

The above chart shows the price of a forex pair forming a bullish trend.

A closer look at the price action during this time reveals that the price of the forex pair is increasing.

The bullish trend is characterized by higher highs (HH) and Higher Lows (HL).

The higher highs were formed as a result of increase in the price of the forex pair.

The higher lows were formed as a result of decrease in the price of the forex pair.

A closer look at the higher highs reveals that each higher high was formed above its previous higher high.

Again, a closer look at the higher lows reveals that each higher low was formed above its previous higher low.

That is how an uptrend should be.

The higher lows formed during the uptrend can be as a result of different factors.

This can lead to consolidation periods in the market which form the higher lows.

Secondly, as the price of the forex pair keeps on increasing, the buying pressure will tend to reduce at some points due to the higher prices.

At the same, the selling pressure will tend to increase.

The reason is that the sellers will be attracted by the higher prices of the forex pair.

The sellers will then jump into the market.

A fight will ensue between the buyers and the sellers, leading to the formation of the higher lows.

Finally, the buyers manage to overpower the sellers, pushing the price of the forex pair even higher.

The moment the sellers manage to overpower the buyers, the market will make a reversal and the price of the forex pair will begin to move downwards.

When the market is in an uptrend, buyers should look to enter long positions.

This means that they should buy the forex pair.

The buyers will earn profit from the increasing price of the forex pair.

Identifying Downtrends

The price of a forex pair is said to be in a downtrend when it is making a series of lower lows and lower highs.

A downtrend means that the price of the forex pair is decreasing.

Consider the chart given below…

identify-a-downtrend

The above chart shows a time at which the price of a forex pair is in a downtrend.

The chart shows that the price of the forex pair is decreasing.

During this time, the price action is forming a series of lower lows (LL) and lower highs (LH).

Identifying Sideways Trends

A forex pair is said to be in a sideways movement when it is neither making a series of higher or lower highs nor a series of higher or lower lows.

For example…

For instance, if the price of a forex pair moves down $1.00, then up $1.00, then down $1.00 and then up $1.00 again, it will form no distinguishable pattern of highs and lows.

Such a forex pair will be said to be making a sideways movement, commonly known as a Range.

When the market is in a range, it is difficult for the trader to know the direction that the price will take at the end of the range.

During this time, the price of the forex pair seems to move between two horizontal lines.

The horizontal line at the top of the price action forms a resistance line for the range.

The horizontal line located at the bottom of the price action forms the support line for the range.

Consider the chart given below…

Identify-a-sidways-market

The above chart shows a time during which the price of a forex pair is in a Range.

The Range has been marked by the two black lines running horizontally on the chart.

The upper horizontal line on the chart is the resistance line for the Range.

The lower horizontal line on the chart is the support line for the Range.

How to Identify the Trend

As a trader, you must be in a position to identify the prevailing market trends.

It is after this that you will be in a position to trade in the same direction as the trend.

This will increase your chances of making profit and finally becoming a successful forex trader.

Let’s discuss the simple ways that you can use to identify the trend…

#1: Draw Triangles on Major Swings

The most reliable and easiest way for a trader to identify a market trend is by following the market swing points.

You can achieve this by using “drawn” triangles on your price chart.

You know very well that a market that makes higher highs and higher lows is in a bullish trend while a market that makes lower lows and lower highs is in a bearish trend.

When you draw rectangles over significant market swings, you will be able to know what is happening.

This will also help you know when the market stops trending and either begins to move in a Range or the trend makes a reversal.

Consider the following chart…

using-triangle-to-identify-a-trend

The above chart shows the formation of an ascending triangle on the price chart of a forex pair.

The ascending triangle has been drawn using black lines and pointed to by a black arrow.

The ascending triangle should act as a signal that there is an impending bullish trend in the market.

The traders should enter long positions once the price action manages to breakout through the upper line of the ascending triangle in a bullish direction.

From the chart, this breakout was followed by a very strong bullish move.

A trader who had entered a long position will make profit from this bullish move.

Consider the chart given below…

Descending-triangle-

The above chart shows the formation of a descending triangle on the price chart of a forex pair.

The descending triangle has been marked using black lines.

The formation of the descending triangle was a signal that there was an imminent bearish trend in the market.

Traders should then take short positions the moment the price action breaks through the lower line of the descending triangle downwards.

A closer look at the chart shows that this was followed by a very strong bearish move.

A trader who had entered a short position will benefit from this bearish move.

#2: Use Moving Averages

The moving average technical indicator is one of the greatest ways for a trader to identify a trend.

The indicator is added on top of the price chart.

Moving averages are of different periods, and the choice of the period depends on the trader.

The location of the price movement in relation to the moving average can help traders know whether the market is in a bullish or a bearish trend.

When the price is moving above the moving average, it’s a signal that there is an upward trend in the market.

When the price is moving below the moving average, it’s a signal that there is a downward trend in the market.

If you are using more than two moving averages on your price chart, they can help you know when the market makes a change in the direction that it is moving.

You should just wait for the moving averages to make a crossover which is an indication of a change in market direction.

Consider the chart given below…

moving-average-to-identify-a-trend

The above chart shows two exponential moving averages added on the price chart of a forex pair.

One of the EMAs is slower than the other one.

The faster exponential moving average has been set to a 10-day period while the slow moving average has been set to a 15-day period.

You should enter a long position when the faster EMA crosses the slow EMA from below.

The reason is that this will be a signal that there is a bullish trend in the market, hence, you can make profit from the rising price of the forex pair.

When the faster EMA crosses the slow EMA from above, it acts as a signal that there is a bearish move in the market.

This is a good time for you to enter a short position.

You can also watch the market for when the price crosses above a moving average to send a signal of a long position, or when the price crosses below the moving average to send a signal of a short position.

When the price was trending above the moving average, it signaled the presence of an uptrend in the market.

When the price was trending below the moving average, it signaled the presence of a downtrend in the market.

#3: Use Trend Lines and Channels

Trend lines and channels are good tools for you to identify a trend and highlight the good potential trading areas within that trend.

You should draw a trend line to connect the highs of swing points or the lows of swing points.

Make sure that you use at least two swing points when drawing a trend line or a channel.

A market that respects the trend line or channel is said to be in a trend.

When the market is testing at the trend line or channel levels, it can give good areas to watch for trading opportunities.

When the market breaks the trend line or channel, it may be moving out of the trend into a range, or it may be making a reversal.

Consider the chart given below…

trendline-to-identify-a-trend

The above chart shows an uptrend line drawn on the price chart of a forex pair.

The uptrend line is the black line added on the chart and pointed to by a black arrow.

The section where the uptrend line has been drawn shows that the price of the forex pair is in a bullish trend.

The chart shows that the price tried to break through the trend line downwards many times.

This is very clear as shown by the swing lows that were formed during the bullish move.

However, the price kept on bouncing off this line.

A closer look at the uptrend line shows that I have used many higher lows to draw it.

This gives a more reliable trend line.

Consider the chart given below…

identify-a-downtrend

The above chart shows a downtrend line added on the price chart of a forex pair.

The downtrend line is the red line pointed to by a red arrow on the chart.

The price of the forex pair is in a bearish trend at the time of the downtrend line.

The price tries to break through the trend line upwards severally.

However, the price bounces off the line and makes a retracement.

In the two trend line charts that I have given above, you will realize that I have used more than two points to draw the trend lines.

It is recommended that you use two or more tops for a downtrend or two or more troughs for an uptrend.

If you draw such a trend line, you will get a tentative trend line.

So, using a high number of points for a trend line will give you a more valid and confirmed trend line, which is better.

Conclusion:

Trend trading is a common trading strategy among forex traders.

This means that each forex trader should be in a position to identify a trend in the market.

It is after identifying a trend that the trader can enter a trade in the same direction as the trend.

There are different tools that traders can use to identify a trend.

It is up to you as the trader to explore the different tools and choose the one that fits your trading strategy.

 

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