Forex for a trader
How to identify strong trend in forex

How to identify strong trend in forex5 Ways To Identify The Direction Of The Trend. Our Trading Courses & Mentorship. Join our team, learn our exact trading strategies , receive a new video with the best setups every week and benefit from our ongoing mentoring in our private community. 5 Ways To Identify The Direction Of The Trend. Trading with the trend is trading with the flow. When the prevailing trend is up, why would you want to look for short entries when buying might result in much smoother trades? Many amateur traders, even when facing a very obivous trend can’t stop trying to predict reversals and burn their fingers going counter-trend, whereas they could have made so much more money by simply joining the trend. But even if you are not a trend-following trader, you can combine the concept of trading with the trend and with momentum with your regular trading approach. Knowing where the price is going and which side of the market is stronger is an important trading skill. To be able to correctly read price action, trends and trend direction, we will now introduce the most effective ways to analyze a chart. In our Forex trading course , you will learn even more about this way of reading and trading price. Intro: The different market phases. Before we learn how to identify the trend, we should first be clear what we are looking for. It may sound too simplistic first, but stick with me for now and you will soon see the power of this analysis approach. Markets can do one of three things: go up, go down, or move sideways. Of course, how fast (or how slow) and how long the individual periods last changes all the time, but price can only do one of those three things. The picture below shows you the three possible scenarios and how the market keep alternating between the phases.

We will shortly see how all price patterns and chart formations are also made up of those moves. Reading trends the simple way: The Line Graph. Most traders only use bars and candles when it comes to observing charts, but they completely forget about a very effective and simple tool that allows them to look through all the clutter and noise: the line graph . The purpose of bars and candles is to provide detailed information about what is happening on your charts, but is this really necessary when it comes to identifying the overall trend? Probably not. A trader should zoom out from time to time (at least once a week) and also switch to the line graph to get a better and clearer picture of what is currently happening. And since our only goal here is to identify the trend direction and become aware of the overall situation, the line graph is a perfect starting point. The market rythm: Highs and lows. This is my personal favorite way of analyzing charts and although it sounds very simple, it is usually everything you need to understand any price chart. Conventional technical analysis says that during an uptrend you have higher highs , because buyers are in the majority and push price higher, and lows are also higher because buyers keep buying the dips earlier and earlier. It works the same during a downtrend: lows are lower when the seller surplus moves price lower and highs are lower because sellers sell earlier and buyers are not as interested. Chart example: Head and shoulders vs highs and lows. Highs and lows define all market patterns and chart formations. Below we see a Head and Shoulders pattern and this pattern is, of course, also made up of highs and lows. This pattern beatifully shows how transitioning highs and lows describe the shifting power between buyers and sellers. We just need to follow the highs and lows to understand what the market is telling us. Try it out and you will be able to describe all market patterns anc conventional chart formations using highs and lows.

Moving averages are undoubtedly among the most popular trading tools and they are great to identify the market direction as well. However, there are a few things to be aware of when it comes to analyzing trend direction with moving averages. The length of the moving average highly impacts when you get a signal when markets turn. A small (fast) moving average might give a lot of early and false signals because it reacts too soon to minor price movements. On the other hand, a fast moving average can get you out early when the trend is about to change. A slow moving average might provide signals too late. Or, it can help you ride trends longer when it filters out the noise. In the screenshot below we used the 50 EMA which is a mid-term moving average. You can see that during an uptrend, price always stayed well above the moving average and once price has crossed the moving average, it entered a range.

In a range, price does not pay too much attention to moving averages because they fall in the middle of the range, hence average . If you want to use moving averages as a filter, you can apply the 50 MA to the daily timeframe and then only look for trades in the direction of the daily MA on the lower timeframes. 4. Channels and trend lines. Channels and trend lines are another way of identifying the direction of a trend and they can also help you understand range markets much better. Whereas moving averages and the analysis of highs and lows can also be used during early trend stages, trendlines are better suited for later trend stages because you need at least 2 touch-points (better 3) to draw a trendline. I mainly use trendlines to identify changes of established trends; when you have a strong trend and suddenly the trendline breaks, it can signal the transition into a new trend. Trendlines during ranges are ideal when it comes to finding breakout scenarios when price enters the trending mode again. Also, trendlines can be combined with moving averages nicely because of the complimentary characteristics. If you want to learn more about trendlines, take a few minutes and watch our video here: learn how to draw trendlines . 5. How to use the ADX indicator.

The ADX is an indicator that you could use to determine the direction of the trend and for the strength as well. The ADX indicator comes with three lines: the ADX line that tells you the strength of the trend (we deleted this line in our example, since we only want to analyze the direction of the trend), the +DI line which shows the bullish strength ( green line ) and the - DI line which shows the bearish strength ( red line ). As you can see in the screenshot below, the ADX signals an uptrend when the green line is on top of the red line, and it signals a downtrend when the red line is higher than the green line. When price is ranging, the two DI lines are very close together and hover around the middle. The ADX can be combined with moving averages nicely and you can see that once the DI lines cross, price also crosses the moving average. In the video below we explain how to use the ADX in more detail with the other concepts. If you like this introduction to reading charts and you want to take your tradint to the next level, take a look at our advanced Forex and Futures trading course. You will learn our professional and profitable trading strategies and also get our best setups every week. 3 Ways to Trade a Strong Forex Trend. by Jeremy Wagner, CEWA-M , Head Forex Trading Instructor. Swing trading, chart patterns, breakouts, and Elliott wave.

Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets. We'll email you login details shortly. You are subscribed to Jeremy Wagner. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. Article Summary: Many t raders of all experience levels follow a simple Forex strategy called trend trading.

Learn three ways to enter trades into the direction of a strong Forex trend. The Forex market consistently attracts traders of all skill levels and strategies. With unconventional methods of economic stimulus becoming more conventional recently, strong trends have developed in the valuation of currencies. One common Forex strategy utilized is a trend following strategy. There are 3 ways to identify trading opportunities into the direction of a strong trend. Buy the dips, sell the rallies Breakouts into new highs or lows Diversify with currency baskets. A common Forex strategy is to buy low and sell high. This type of strategy is generally sought out by many newer traders. More experienced traders will also buy dips and sell rallies too, but they bring a filter with an edge to this strategy.

More experienced traders filter signals with a strong trend. You see, many traders utilize indicators and oscillators to help them determine when currency pairs have become oversold so they can buy low. On the other hand, traders look for overbought levels on the oscillator to aid them in deciding when to sell. The signals on oscillators are generally straightforward and easy to read. However, one trading tip we offer in our Forex courses is to filter your signals in the direction of the trend. Follow this 3 step guide to buy dips and sell rallies to improve the consistency of your trading. A breakout strategy is technically the opposite of buying dips in a rally. In a breakout, wait for the price to move higher, and then buy at a higher price than you would have when buying dips. This begs the question, why somebody would want to do this? The reason is because the market is made up of emotions. There are times when the prices don’t seem rational which is how bubbles develop. Breakout trading simply looks to play on those emotions because the reason prices are moving higher may not be rooted in fundamentals, but that traders are getting greedy and buying with all they have. Several famous traders like the Turtle traders used a breakout strategy. Therefore, the advantage a breakout strategy is confirmation.

You get entered into the buying position only when prices have confirmed they are ready to trade at new highs. Therefore, if the confirmation doesn’t come and if prices do not trade to new highs, then you have been kept away from a losing trade . A currency basket is a collection of currency pairs traded where the sole purpose is to highlight a specific currency’s move. For example, if you felt the US Dollar was going to gain strength and wanted to buy a US Dollar basket, you might look to place the following trades: One advantage of basket trading is diversification. Since exchange rates are quoted as currency pairs, but wrong on the trade. For example, let’s assume you decide to trade the USDJPY because of US Dollar strength. If the JPY gains more strength than the USD, then you would have been right about US Dollar strength, but wrong on the trade simply due the other currency you matched it up against. On the other hand, if you diversifying the trade as a basket, then you are boiling the trade down to a US Dollar move. Forex trends can last a while, so a powerful basket approach can be a less stressful way to trade these trends. Good luck with your trading! ---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education. Follow me on Twitter at @JWagnerFXTrader . To be added to Jeremy’s e-mail distribution list, click HERE and enter in your email information. See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

Trading baskets can be handled several ways. The mirror platform offers a one click method to enter and exit the basket trade. Enroll for a free Mirror practice account to test out basket trading. You can also use the same Mirror account to trade strategies on strong trends. Watch this short video to learn how. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. What Does a Strong Trend Look Like? Your Forecast Is Headed to Your Inbox. But don't just read our analysis - put it to the rest. Your forecast comes with a free demo account from our provider, IG, so you can try out trading with zero risk. Your demo is preloaded with ?10,000 virtual funds , which you can use to trade over 10,000 live global markets.

We'll email you login details shortly. You are subscribed to Richard Krivo. You can manage you subscriptions by following the link in the footer of each email you will receive. An error occurred submitting your form. Please try again later. The premise behind trading strong trends is that a trader will be able to identify the direction in which the market has been taking the pair over time. By trading the pair in only that direction, a trader will be increasing the likelihood of having a successful trade since they are trading with the momentum of the market behind their trade. Personally, I prefer to consult a Daily chart for the trend. For me I find it a good blend between a much longer term chart, such as a Weekly or a Monthly, and an intraday chart such as a 1 hour or 15 minute. On the Daily chart of the NZDCHF pair below, we see an excellent example of a pair that is in a strong uptrend… First off, we can simply see that price is moving up at roughly a 45 degree angle from the lower left to the upper right side of the chart…that is our first visual cue. In more technical terms, the pair is trading above the 200 SMA , price action has been making higher highs (noted in green) and higher lows (noted in red) since May 18, and the NZD is a strong currency at the time of this chart while the CHF is a weak currency.

Given all this information, as traders we now know that we only want to look for opportunities to buy this pair as that will put the odds of having a successful trade more in our favor. Now let’s take a look at a pair that is in a strong downtrend…the GBPAUD. Our first visual cue in the case of this chart is that price is moving down at roughly a 45 degree angle (the steeper the angle the stronger the trend) from the upper right to the lower left of the chart. Beyond that we can see that the pair is trading below the 200 SMA, price action has been making lower highs and lower lows since May 23, and the GBP is weak and the AUD is strong at the time of this chart. With this information, as traders we now know that we only want to look for opportunities to sell this pair as that will put the odds of having a successful trade more in our favor since we are trading the pair in the direction that is favored by the market. As a bonus, here is a chart that as one who trades strong trends I would avoid… In the case of this GBPUSD Daily chart we can see that since the end of May the pair has been trading flat…in a range . All the highs are about the same and all the lows are about the same as well. Price is trading right along and just below the 200 SMA and the GBP and the USD are both weak currencies. As far as trend trading this pair goes, there is no discernible trading edge. A range trader however, might look at this pair as a very likely candidate. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

ADX: The Trend Strength Indicator. Trading in the direction of a strong trend reduces risk and increases profit potential. The average directional index (ADX) is used to determine when the price is trending strongly. In many cases, it is the ultimate trend indicator. After all, the trend may be your friend, but it sure helps to know who your friends are. In this article, we'll examine the value of ADX as a trend strength indicator. ADX is used to quantify trend strength. ADX calculations are based on a moving average of price range expansion over a given period of time. The default setting is 14 bars, although other time periods can be used. ADX can be used on any trading vehicle such as stocks, mutual funds, exchange-traded funds and futures. (For background reading, see: Exploring Oscillators and Indicators: Average Directional Index .) ADX is plotted as a single line with values ranging from a low of zero to a high of 100. ADX is non-directional; it registers trend strength whether price is trending up or down.

The indicator is usually plotted in the same window as the two directional movement indicator (DMI) lines, from which ADX is derived (Figure 1). For the remainder of this article, ADX will be shown separately on the charts for educational purposes. When the +DMI is above the - DMI, prices are moving up, and ADX measures the strength of the uptrend. When the - DMI is above the +DMI, prices are moving down, and ADX measures the strength of the downtrend. Figure 1 is an example of an uptrend reversing to a downtrend. Notice how ADX rose during the uptrend, when +DMI was above - DMI. When price reversed, the - DMI crossed above the +DMI, and ADX rose again to measure the strength of the downtrend. The ADX indicator is a great way to determine when a price is trending, but how do you determine the optimal entry and exit points for a trade? The Technical Analysis course on the Investopedia Academy provides a great introduction to the wider field of technical analysis and explains how indicators like the ADX indicator can work together to find profitable trades. Quantifying Trend Strength. ADX values help traders identify the strongest and most profitable trends to trade. The values are also important for distinguishing between trending and non-trending conditions.

Many traders will use ADX readings above 25 to suggest that the trend is strong enough for trend-trading strategies. Conversely, when ADX is below 25, many will avoid trend-trading strategies. Low ADX is a usually a sign of accumulation or distribution. When ADX is below 25 for more than 30 bars, price enters range conditions, and price patterns are often easier to identify. Price then moves up and down between resistance and support to find selling and buying interest, respectively. From low ADX conditions, price will eventually break out into a trend. In Figure 2, price moves from a low ADX price channel to an uptrend with strong ADX. The direction of the ADX line is important for reading trend strength. When the ADX line is rising, trend strength is increasing, and the price moves in the direction of the trend. When the line is falling, trend strength is decreasing, and the price enters a period of retracement or consolidation. (For more on this topic, check out: Retracement or Reversal: Know the Difference .

) A common misperception is that a falling ADX line means the trend is reversing. A falling ADX line only means that the trend strength is weakening, but it usually does not mean the trend is reversing, unless there has been a price climax. As long as ADX is above 25, it is best to think of a falling ADX line as simply less strong (Figure 4). The series of ADX peaks are also a visual representation of overall trend momentum. ADX clearly indicates when the trend is gaining or losing momentum. Momentum is the velocity of price. A series of higher ADX peaks means trend momentum is increasing. A series of lower ADX peaks means trend momentum is decreasing. Any ADX peak above 25 is considered strong, even if it is a lower peak. In an uptrend, price can still rise on decreasing ADX momentum because overhead supply is eaten up as the trend progresses (Figure 5). Knowing when trend momentum is increasing gives the trader confidence to let profits run instead of exiting before the trend has ended. However, a series of lower ADX peaks is a warning to watch price and manage risk. The best trading decisions are made on objective signals, not emotion. ADX can also show momentum divergence. When price makes a higher high and ADX makes a lower high, there is negative divergence, or non-confirmation. In general, divergence is not a signal for a reversal, but rather a warning that trend momentum is changing. It may be appropriate to tighten the stop-loss or take partial profits.

(For more, see: Divergences, Momentum and Rate of Change .) Any time the trend changes character, it is time to assess andor manage risk. Divergence can lead to trend continuation, consolidation, correction or reversal (Figure 6). Strategic Use of ADX. Price is the single most important signal on a chart. Read price first, and then read ADX in the context of what price is doing. When any indicator is used, it should add something that price alone cannot easily tell us. For example, the best trends rise out of periods of price range consolidation. Breakouts from a range occur when there is a disagreement between the buyers and sellers on price, which tips the balance of supply and demand. Whether it is more supply than demand, or more demand than supply, it is the difference that creates price momentum. Breakouts are not hard to spot, but they often fail to progress or end up being a trap. But ADX tells you when breakouts are valid by showing when ADX is strong enough for price to trend after the breakout.

When ADX rises from below 25 to above 25, price is strong enough to continue in the direction of the breakout. ADX as a Range Finder. Conversely, it is often hard to see when price moves from trend to range conditions. ADX shows when the trend has weakened and is entering a period of range consolidation. Range conditions exist when ADX drops from above 25 to below 25. In a range, the trend is sideways and there is general price agreement between the buyers and sellers. ADX will meander sideways under 25 until the balance of supply and demand changes again. (For more, see: Trading Trend or Range? ) ADX gives great strategy signals when combined with price. First, use ADX to determine whether prices are trending or non-trending, and then choose the appropriate trading strategy for the condition. In trending conditions, entries are made on pullbacks and taken in the direction of the trend. In range conditions, trend-trading strategies are not appropriate. However, trades can be made on reversals at support (long) and resistance (short). The Bottom Line: Finding Friendly Trends. The best profits come from trading the strongest trends and avoiding range conditions.

ADX not only identifies trending conditions, it helps the trader find the strongest trends to trade. The ability to quantify trend strength is a major edge for traders. ADX also identifies range conditions, so a trader won't get stuck trying to trend trade in sideways price action. In addition, it shows when price has broken out of a range with sufficient strength to use trend-trading strategies. ADX also alerts the trader to changes in trend momentum, so risk management can be addressed. If you want the trend to be your friend, you'd better not let ADX become a stranger. (For further reading, check out: Keep It Simple and Trade With the Trend .) Trend Strength and Exhaustion and Trend Indicators. If you have been following us on LuckScout, you know that we trade through following the strong candlesticks patterns and their combination with Bollinger Bands.

Most of the trade setups we take are reversal trade setups. We take the continuations trade setups too, but under some special conditions and while a too strong trade setup forms on a consolidation which is formed on a strong trend (I am explaining it below). After the candlestick pattern’s strength, and the Bollinger Bands breakout, the location where the candlestick pattern is formed is very important for us. For example, when a too strong reversal candlestick pattern forms on a too strong trend and while the trend is still too strong, we ignore the trade setup, because it is too risky to go against the trend while it is still strong. However, when a too strong reversal candlestick pattern with a strong Bollinger Band breakout form where the trend is exhausted, we take the trade setup, because it is not too risky to go against the trend when it is exhausted. Now, the question is how we can say that a trend is exhausted or is still strong and potent and it will be too risky to go against it? That is the question I am asked almost every day, because many of you still have problems to distinguish whether the trend is still strong or has become exhausted. Although I have already written several articles and analysed too many sample trade setups to show you how to locate a too strong candlestick pattern with a strong Bollinger Bands breakout on an exhausted trend, I am going to explain about this topic more in this article. However, it will be great if you read those articles first. Please refer to this article and read all the articles listed in it. Now, I am going to explain about the trend strength in the markets, and then explain how and when a trend becomes exhausted. I am going to support my explanation with some examples. Although we don’t use any indicator to measure the trends strength or exhaustion, I will introduce some of the most famous indicators that are used for this purpose, and will tell you which one is the best. Maybe novice and inexperienced traders want to have these indicators on their charts at least for a while to know whether the trends are still strong, or are getting exhausted.

Of course, the price chart talks by itself and we don’t need any indicators to know whether the markets is trending or ranging. Markets Strong Trends. One of the most famous features of the currency market is the ability of creating strong and continuous trends. The other markets, including the stock market, usually don’t form such strong trends that the markets forms. There are some exceptions in stock market that I show you here to have a comparison with the trends we have on the markets. Google’s stock uptrend is one of the strangest on the stock market. It has been trending up almost continuously since September 2004 that Google entered the New York Stock Exchange. It has been going up from $49.95 to $607.22 and it seems it will go even higher: Another example from a strong trend in stock market belongs to Apple. Its strong uptrend was started almost from December 2009 that it broke above the $27.70 resistance level. Although it went down from September 2012 to June 2013, but it is a while that it has kept on going up to continue its strong trend: Google and Apple are two examples of the too strong trends on the current stock market. They are exceptional in the history of stock trading. Microsoft did the same long time ago and formed a too strong uptrend from 1986 to 1999, but went down after that and formed a ranging market for several years. It is since March 2009 that it has started going up again: American Online (AOL) is also another exception. The great decision they made on February 2011 to buy Huffington Post for $351 million, saved the company from bankruptcy.

AOL share went up from $12 on September 2011 to $50.77 on January 2014: Although there are too many other strong companies, they have not been able to form such trends. Most companies are going sideways for several years. Look at Yahoo stock which has been moving sideways almost since 2001: Google, Apple, Microsoft and also what AOL did recently are just exceptional trends on the stock market. Such trends form usually once in the history of a company, and they never become repeated again. However, too strong trends on the markets are what we see with different currency pairs sometimes several times per year. Look at the most recent trend EURUSD has formed on the daily chart since 2014.05.08: You can locate tens of trends like this with different currency pairs on different short and long time frames. Compared to the stock market, currency market trends are much much stronger and more profitable. Currency Market Trends Strength And Exhaustion. Now, let’s get back to our discussion which is about the currency market trends strength and exhaustion. As I told you, forming a too strong candlestick reversal pattern with a strong Bollinger Band breakout is not enough for us to take a position. Where the pattern is formed, is also very important. For example, when a too strong Dark Cloud Cover or Bearish Engulfing Pattern that are strong bearish reversal patterns, sell signals or short trade setups, form on a too strong uptrend, we don’t go short, because it is too risky to go short on a too strong uptrend and while the trend is still strong, even if the candlestick pattern is too strong. For example, a too strong Bearish Engulfing Pattern formed by 2012.09.06 candlestick on GBPAUD daily chart while there was a too strong uptrend. Although the 2012.09.06 candlestick was a relatively strong bearish candlestick and it formed a strong Bearish Engulfing Pattern, as it is formed right on a too strong bull market, it has to be ignored. This is true that GBPAUD went down for a few candlesticks after that, but we never know.

We have to take the strongest and safest trade setups: What do I mean when I say the uptrend was too strong? Look how strongly the price has been going up for several consecutive candlesticks (below). Such a strong upward movement means bulls have the full control and they will not give up so easily. As you see, the price went down after the 2012.09.06 Bearish Engulfing formed, but it was stopped by the Bollinger Middle Band and went up strongly again: Several days later, another strong Bearish Engulfing Pattern forms on GBPAUD daily chart by 2012.10.08 candlestick. The difference was that this time the uptrend was not as strong as it was when the 2012.09.06 pattern formed, because although the small bearish movement that formed after the 2012.09.06 pattern was not that strong, it could be known as an exhaustion signal indicating bulls were not as strong as they were used to be. After the small bearish movement (1st exhaustion signal), another small exhaustion signal formed (2nd exhaustion signal) that was stopped by Bollinger Middle Band, and the uptrend was continued for a few more candlesticks, but then the 2012.10.08 pattern formed. Look how the price collapsed after this pattern formed (the big red arrow on the below chart), compared to the time that the 2012.09.06 pattern formed. Now you see the difference. The 2012.10.08 pattern formed when the uptrend was exhausted, but the 2012.09.06 pattern formed when uptrend was still too strong: So, when a too strong candlestick pattern with a strong Bollinger Band breakout forms somewhere, we should also look for the exhaustion signs formed before the candlestick pattern. The exhaustion sign can look different on different charts. They should be able to assure you that the trend is not too strong anymore and can reverse after a strong reversal signal. Is there any guarantee that the market follows a too strong trade setup that has formed on an exhausted market? Of course not. It is possible that the trend keeps on following the same direction it has been following, for several more candlesticks, even when there are some good exhaustion signs.

However, we have to do our best to take a trade setup that has a lower risk. To lower the risk, it is better to take the too strong trade setups that are formed on the exhausted trends. Although there is no guarantee that these trade setups work 100% of the time, it is still safer to take them, compared to the trade setups that form right on the too strong trends. Now, let’s take a look at a long trade setup formed on a bearish market. On 2010.10.25, a strong Doji with a strong Bollinger Lower Band breakout closed on GBPAUD daily chart. It was confirmed by the next candlestick. That was a strong long trade setup, but the problem was that it was formed right at the bottom of a too strong bear market while no signs of exhaustion was formed before (the big red arrow at the left side of the below chart). Therefore, the price made some too small bullish movements (the green arrow), and then kept on going down very strongly. That is why we have to avoid the reversal trade setups that form right on the strong trends. This is what the trend strength and exhaustion mean. A trend is still too strong when no exhaustion sign is formed on it. The first exhaustion sign that forms on a strong trend means that the trend is not as strong as it was used to be. It can still keep on following the same direction for such a long time, but the second exhaustion sign will appear sooner than later. When the trend goes to a range and starts moving sideways, it means it is too exhausted. If the range to be continued for a long time, then the price will change the direction and will go against the trend most probably. This is something that happened on GBPCAD daily chart on 2014.08.06. There was a too strong uptrend already formed on the chart (the big green arrow on the below chart), and then the market started moving sideways and formed a range (the middle red arrow). The range was continued and it became longer than what a typical consolidation has to be. Therefore, when a too strong Dark Cloud Cover formed while the market was moving sideways, the price collapsed for over 800 pips (the big red arrow at the right): On LuckScout, we compare all the short trade setups we locate with this short trade setup, because it is the typical sample of a short trade setup that we take.

What if the market doesn’t keep on moving sideways for a long time and just forms a consolidation? Then unlike what happened with GBPCAD in the above example (the uptrend reversed and the price collapsed), the trend will be continued after forming a strong trade setup. This is something that occurred on CHFJPY weekly chart: Like GBPCAD strong uptrend on the daily chart, there was a too strong uptrend on CHFJPY weekly chart. After the 2013.12.29 candlestick closed, the uptrend stopped going up and formed a consolidation. Five weeks ago, a long trade setup formed above the consolidation support line, and so the uptrend was continued. If the market had kept on moving sideways like what GBPCAD did, then the uptrend would have collapsed after a strong short trade setup: Hope what I have explained so far is clear enough. As you saw, the price chart is enough to know whether the trend is strong or is exhausted. You can easily know whether you can go against the trend, or you have to wait for a continuation trade setup. However, there are some indicators that can help you know whether the trend is still strong or exhausted, or is about to get exhausted. If you have any problems to distinguish the trend strength or exhaustion, and you can not see the exhaustion signs, you can add these indicators to your charts till you become experienced and skilled enough to know the trends behaviour.

MACD is one of the strongest trend indicators for all markets. Let’s add it to the above charts and see whether it can show the trend strength and exhaustion or not. Below is the GBPCAD daily chart I showed you above. As you see, while the uptrend is still too strong, MACD histogram is moving above the zero level and forming higher highs. However, as soon as the uptrend is stopped and the price starts moving sideways, MACD bars break below the zero level and start forming short bars below and above this level. When the price is moving sideways no long MACD bars form on the chart and also you don’t see those strong highs and higher highs anymore. When MACD is sending you such a signal after a strong uptrend, you have to get ready for a too strong short trade setup to go short: Below is the CHFJPY weekly chart: Same story here again. When the uptrend is strong, MACD bars form above the zero level and are long and strong. However, after forming a MACD Divergence which is a strong reversal signal, the price starts moving sideways and MACD bars become much shorter. In spite of having a strong MACD Divergence, we will never go short when there is no too strong short trade setup formed by the candlesticks. Instead, we wait for the trend continuation setups while the consolidation is still short enough to be known as a consolidation, and has not become a too long ranging market like what you saw with GBPCAD: There are some other trend indicators like Average Directional Index or ADX, and also different kinds of moving averages, but as they don’t work as strong as MACD, I am not going to waste your time by them.

If you are supposed to have a trend indicator on your charts, MACD is the best one. I also wrote an article about slower settings of MACD which is what you may want to try (below charts). Please note that on both of the below charts (CHFJPY weekly and GBPCAD daily chart), the trade setup formed exactly when MACD bars had became too small compared to the time that the price was trending and going up strongly. With CHFJPY, it meant the trend wanted to be continued after a while that the market has been slow (consolidating), and with GBPCAD it meant the trend wanted to reverse after a while that the market has been ranging and moving sideways. Just before you go, did you check This System? Make sure to do it now, otherwise you will regret. The Stages Of A Forex Trend. A trend is simply a tendency for prices to move in a particular direction over a period of time. Trends can be long term, short term, upward, downward, and even sideways. When investing in the forex market, your success is tied to your ability to identify trends and position yourself for profitable entry and exit points. Let's look at some stages of a forex trend and how they affect investors.

(For related reading, see Anticipate Trends To Find Profits. ) TUTORIAL: Technical Analysis & Technical Indicators. Economic Trends Reflected in Currencies For the most part, an economy that is strong will also have a strong currency. Economic strength attracts investment, and investment creates demand for a currency. In recent times, the demand for gold as an alternative to fiat currencies has led to a currency demand in those countries that produce gold, such as Australia, South Africa and Canada. (For more, see How To Trade Currency And Commodity Correlations. ) Example of a Trend in the Australian Dollar Against the U. S. Dollar Note how the economic factors, in this case a demand for gold and the higher interest rates in Australia, have created a demand for the Australian currency. The demand will last until the exchange rate becomes too high and negatively affects Australian exports. In addition, factors in other economies have to be taken into account, since no single currency can act in isolation of the rest of the world's economies. The chart below (Figure 1) of the weekly AUDUSD shows the recent upward exchange rate trend in the Australian dollar against the U. S. dollar. While the price (exchange rate) oscillated back and forth in a regression channel, providing some short-term trades in the opposite direction, the prevailing upward trend remains in tact. (For more, see Forex: Should You Be Trading Trend Or Range?

) U. S. Dollar versus the Canadian Dollar In the chart below, the Canadian dollar has strengthened against the U. S. dollar. Canada is also a commodities-producing country, with a lot of natural resources. In the case of the Australian dollar chart, there is an upward-sloping growth path as the demand for Australian dollars increases. Since the Australian currency is the base currency and the U. S. dollar is the quote currency, the chart shows a strong upward-trending and strengthening Australian dollar. On the other hand, in the case of the Canadian dollar against the U. S. dollar, the U. S. dollar is the base currency while the Canadian dollar is the quote currency. Thus the chart shows the U. S. dollar sloping downward as it weakens against the Canadian dollar. (For related reading, see Using Bollinger Band® "Bands" To Gauge Trends. ) The conventional wisdom amongst traders is that "the trend is your friend." While this is good advice, we have to add the cautionary line that "the trend is your friend …

until it ends." Trends Vs. Ranges Of course, the difficult questions to answer are whether we are in a trend at all, or just in a sideways-trading range, and where and when a trend will start and where and when it will end. Let us first look at the question of where a trend could possibly start, and once started, where to take part in the action. To answer these questions, we need the help of some technical analysis. To keep our analysis as simple as possible, we'll create a chart that uses a weekly time frame and uses only two indicators. The first indicator is a simple 20-period moving average calculated on the closing prices. However, to give us a little wiggle room we will also add an additional 20-period simple moving average, but this time calculated on the price "highs." Then we will add another 20-period simple moving average calculated on the price "lows." The result is a moving average channel that will reflect a dynamic price equilibrium. (For more, see Deadly Flaws In Major Market Indicators. ) We will use this channel to give us an idea of when prices are trending up and when prices are trending down. We will assume that if prices break below the channel there is a potential down trend, and if they break above the channel there is a potential uptrend. Also notice that when a market trends in either direction, there is the tendency for prices to move away from the channel and then to return to the channel as volatility increases and decreases, respectively. With volatility, prices always tend to revert to the mean over a period of time. This reversion to the mean provides either buying or selling opportunities depending on the direction of the trend. In addition to the moving averages, we also add a RSI set to a two-period, instead of the usual 14-period, with the plot guides set to 90 and 10 instead of the usual 70 and 30. (For more, see Find Forex Profit With The RSI Roller coaster.

) The chart shows some interesting opportunities. Look at the RSI and each time it reaches an extreme at the 90-plot guide it provides a sell opportunity while the trend is downward and prices are below the channel. Each time the RSI reaches the 90-plot guide, the price has also moved back to the channel, providing a new opportunity to sell in the direction of the trend. Conversely, as the trend moves upward, prices revert to the channel at the same time as the RSI reaches the 10-plot guide, providing new buying opportunities. Trading in the above manner means trading only in the direction of the trend each time it corrects, thus providing a new opportunity to participate. Many traders will look to trade reversals. A reversal point is always where a trend starts or ends. To find these potential reversal points, we would look for price patterns (such as double or triple tops or bottoms), Fibonacci levels or trend lines. A reversal often occurs at a 127.2 or a 161.8 Fibonacci extension.

Therefore, it is also useful to plot the Fibonacci lines on the weekly charts and then to watch what occurs on the daily chart as prices approach one of the Fib levels. (For more, see Make Money With The Fibonacci ABC Pattern. ) You will also discover that some trends are stronger than others. In fact, some trends become so exuberant that prices form a j-shaped or parabolic curve. On the next chart, we see an example of an irrational parabolic-shaped price curve of the World Silver Index. It is irrational because traders are pushing silver prices up, as the whole commodities complex is benefiting from strong fund flows into futures and ETFs without there being an equal and natural demand for the underlying product. This is a case of "musical chairs" and when the music stops the exit door will become very narrow and late arriving traders will get hurt. The "spinning top" candlestick on the weekly silver chart should be a strong warning sign to traders that the trend could be ending. (For more, see Advanced Candlestick Patterns. ) In the case of the Canadian and Australian dollars (Figures 1 and 2), the curve shape follows a more normal upward slope than the silver price does. Traders should always be aware of the curve shapes, since parabolic curves indicate a "bubble" mentality developing in the market. Stages of a Trend Elliot Wave fans will observe that trending markets move in a five-step impulsive wave followed by a three-step ABC correction. Many investors prefer to count pivots, and they look for between seven and 11 advancing pivots, especially taking note of the pivot count as the price reaches a strong resistance level. (Learn how to set up a trading plan using this method. See Using Elliott Wave To Trade Forex Markets.

) We can't predict the future, but we can calculate the potential success of a trade by stacking various factors in an effort to tilt the odds in our favor. Since all speculation is based on odds, not certainties, we need to be mindful of risk and employ methods to manage the risk. When placing a trade, it is essential to always place stops to limit losses, should the trade not go our way. Remember that the major market makers know where all the stops are sitting and could, in certain circumstances (especially in times of low liquidity) reach for the stops. Thus, our stops should be in a place where there is enough room to prevent them from being taken out prematurely. To best manage a stop policy in trending markets, use "volatility stops." The well-known Parabolic SAR indicator can also be used to trail the market and take profits once the stop is hit. In the chart below (Figure 5), you can see how the 50-period three ATR trailing volatility stops trail prices and provide exit points if the trend suddenly reverses. The Bottom Line It is best to trade with the trend but to be alert as to when a trend is exhausted and a correction or reversal of the trend is in order. By observing and listening to market sentiment, following news announcements and using technical analysis to help time entries and exits, you should be able to develop your own personal rule-based system that is both profitable and simple to execute. (For more, see Seasonal Trends In The Forex Market. ) How To Trade Trends In Forex – A Complete Guide. We’ve all heard the saying “The trend is your friend”, and while it sounds nice it doesn’t really teach us anything about trading a trending market or how to identify one. In today’s lesson, I am going to give you guys some solid information on trend trading that you can begin using immediately. Today’s lesson is all about trading trending markets with price action, and we are going to talk about how to tell when a market is trending and how to take advantage of these trends. I hope you guys pay close attention to today’s article and refer back to it when you have any questions about how to trade or identify a trending market. In fact, if you email me asking about trends…

I will probably refer you to this article! Let’s get started… The first step: Learn to identify a trend with nothing but raw price action. As you probably already know, there are tons of different indicators that you can put on your charts to ‘help’ you identify a trending market and trade with it. Many traders spend countless hours and dollars on trend-following trading systems or on indicators that just end up confusing them and making the process of trend discovery a lot more difficult than it needs to be. I have always been a strong proponent of visual observation of the raw price action of a market, as you probably know. I also believe that simply observing a market’s raw price action, from left to right, is the easiest and most effective way to identify a trend and to spot high-probability entries within it. Let me make a quick note before we proceed: A trend is not actually a strategy by itself; it’s just an added point of confluence that increases the probability of a trade. However, just randomly jumping in with a trending market is not an edge or a strategy. As a market moves higher or lower, its previous turning points, or swing points as I like to call them, become reference points that we can use to help us determine the trend of a market. The most basic way to identify a trend is to check and see if a market is making a pattern of higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend. This is just plain old visual observation of a market’s naturally occurring price action…no mumbo-jumbo trading systems or magic-bullets here. I’d like you guys to take a look at this simple diagram that I drew below; it shows us the basic idea of looking for higher highs (HH) and higher lows (HL) for uptrends and lower highs (LH) and lower lows (LL) for downtrends: Note: each colored circle is highlighting what we would consider a ‘swing point’ in the market: Thus, general observation of a market’s swing points is the first point of call in determining if a market is trending.

If you do not see a pattern of HH HL or LH LL, but instead you see sideways price movement with no obvious general up or down direction to it, then you are probably looking at a range-bound market or one that is simply chopping back and forth. Tip: You shouldn’t have to think too hard about whether a market is trending or not. Most traders make trend discovery WAY too difficult. If you take a common sense and patient approach, it’s usually fairly obvious if a market is trending or not just by looking at the raw price action of its chart, from left to right. Make sure you mark the swing points on your chart, as it will draw your attention to them and help you see if there’s a pattern of HH and HL or LH and LL, as discussed above. Characteristics of trending markets. Trending markets tend to make strong moves in the direction of the trend followed by periods of consolidation or a counter-trend retrace before the next leg in the direction of the trend. You will notice this pattern happens in almost any trend you can find. Typically, what happens to many traders is that they will make some money during the periods of strong directional trend movement, but then they continue to trade as the market takes a breather from the trend and consolidates. It’s these periods when traders give up all of the gains they just made when the market was moving aggressively. You need to learn to identify the different parts of a trend, this will help you avoid over-trading during the choppy consolidation periods and will give you a better chance at profiting when the trend makes a strong move.

Here is an example of what I’m talking about: In the diagram above, we can see that a trending market tends to move in spurts, moving in the direction of the trend and then stalling to take a breath before another leg in the direction of the trend. Now, all trends are obviously not exactly the same, but we do typically see the general pattern described above; a forceful move in the direction of the trend followed by a period of consolidation or a retracement in the opposite direction. Now, these retraces are when we have the highest potential for a high probability entry within the trend. Often, a market will retrace to approximately the level of its previous swing point before the trend resumes. In an uptrend these swing points are support and in downtrends they are resistance. Look at the very first diagram in this article for a quick refresher on what I’m talking about. Also, let’s look at the chart we just looked at but this time with the support levels marked. These support levels resulted after the market began to retrace lower within the structure of the broader uptrend. Note the ‘stepping’ pattern left behind by the swing points in this uptrend. As the market retraces back down to these ‘steps’ or support levels, we would focus our attention and watch for price action signals forming near these levels to rejoin the uptrend: Note: These same principles apply in a down trending market but we would be looking for price action setups from resistance rather than support. As we discussed previously, a trending market will tend to surge in one direction and then slow down and either consolidate in a sideways manner or retrace lower or higher, depending on what direction the dominant trend is. It is during these contraction or retrace moves that we can focus extra hard through our ‘sniper-scope’ and begin searching for high-probability price action trading strategies forming from previous swing points within the overall trend. Trading from value in trends.

My primary mission as a price action trader is to watch for obvious price action setups that form after a market retraces back to a confluent level in the market. This can be a swing point like we discussed above, a moving average level, or some other support or resistance level. Whatever the case, I am looking to trade from ‘value’ in a trending market. By value, I mean from an optimum point in the market that has proved significant before. For example, in an uptrend I would consider ‘value’ to be support, since that is where the price of the market is likely to be seen as a good ‘value’ for the bulls, and thus they will tend to buy from that level and push the price higher. Whereas, in a downtrend, ‘value’ is seen at resistance, since the price has rotated higher within the broader downtrend; so it’s a good ‘value’ to sell from resistance in a downtrend. These rotations back to value points can also be called ‘trading from the mean’ or the ‘average’ price, this is why moving averages tend to act as dynamic support or resistance levels. One tool we can use to find ‘value’ in a market is a moving average. I don’t use them all the time, but when I do I like to use the 8 and 21 day exponential moving averages. I use them as a general guide and a helper to find confluent points in a market.

For example, often the 21 day EMA will align with a swing point in a trending market, this would be considered a confluent level since you have multiple factors lining up together. Then, if we see a price action signal there, we know we are seeing a setup form in a very high-probability area on the chart. See here: Note: these moving averages should only be used as a ‘general guide’ and never as an actual signal (as in the old ‘moving average crossover signal’). We only use them as a helper to see dynamic support and resistance levels (to add confluence) and for trend direction. But just to be clear, our main focus is on visual observation of a market’s price action and levels, that is to say without any EMAs. Don’t fall into the ‘breakout’ trap – Many amateur traders get stuck in a cycle of trying to trade breakouts all the time…this is not really an effective long-term strategy because the ‘big boys’ all know that amateurs are constantly trying to buy and sell breakouts. Instead, we want to enter closer to key market levels, swing points, EMA levels (confluent levels) in the market…always with confirmation from a price action signal. As a ‘regressive’ price action trader, we are looking to buy or sell from value within the trend…waiting for the inevitable pullback and then pouncing on an obvious price action signal if one forms.

Forex trends vs. other markets. One aspect of trend trading that I want to touch on briefly is that trends in Forex tend to differ from those in other markets, especially equities. In Forex, bearish and bullish trends are typically equally as violent and potent…whereas in equity markets we tend to see slower moving price action in a bull market, along with lower volatility. Down-trending markets tend to be fast and volatile in equity markets. Forex trends tend to be the same in their volatility and price action whether the trend is up or down. The main reason is because it’s one currency against another in any given currency pair and this results in more balanced price movement. Thus, in Forex, your trading strategy and plan will generally be the same for both up and down markets. Here’s an example of the EURAUD daily chart recently that shows just how consistent both down trends and up trends can be in this market…note how the volatility and speed of these trends were about the same: In the equity markets, traders typically need to adjust their strategies or systems as a market moves from bull to bear or vice versa. But in Forex, whether you’re trading long or short, bull or bear, the volatility of a currency pair tends to say about the same.

That’s not to say that volatility never changes in Forex, it just means that the particular direction of a Forex pair doesn’t have a very big impact on that pair’s volatility or price action, as it does in the equity markets for example. Final notes on trading with trends: Take advantage of trends when they happen – There is never anything concrete with trends…meaning you never know how long they will last for, so try to take advantage of them when they do occur. Markets typically only trend about 25 to 35% of the time, and the rest of the time they are range-bound or chopping in a sideways fashion. The trick is to learn how to identify a trending market so that you can get the most out of it and get on board as early as possible. Counter-trend trading – Overall, trend trading should make up about 70% of the trades you take, and the other 30% might consist of counter-trend trades or trades in range-bound markets. It’s best to learn how to trade with near-term trend before you try trading counter-trend, because trading with the trend is naturally higher-probability than trading against it. In conclusion, trend trading is perhaps the ‘easiest’ way to make money in the forex markets. Unfortunately, markets don’t trend all the time, and it’s the time in between trends that traders do the most damage to themselves. This damage is a result of not having the discipline to wait for high-probability setups to appear, and not being able to properly read a market’s price action to determine whether or not it’s trending.

I trust that today’s lesson has helped you get an idea of how to determine whether a market is trending or not and how to trade a trending market. Remember, there’s no ‘Holy-Grail’ for trend trading, but if you’re in doubt, the best thing to do is to just relax and take some time to visually observe the last few weeks of price data in a market…without indicators. This no-nonsense approach is hard to beat and will work if you know what you’re looking for. Finally, I leave you with this little formula: The Best Trades = Trend + Confluent level + Price action signal. I’ve touched on some topics that traders can use for short-term trend analysis today, and I expand on these topics in the members’ article section of my price action traders’ community. Trend following is a large part of my Price Action Forex Trading Course and of my general trading strategy. I’d really love to hear your feedback today, so please remember to leave your comments below & click the ‘like button’.


  • How to identify strong trend in forex