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Following a trend is like following the flow and leveraging the most optimum opportunity that a market can provide at that given time. When a breakout or any other form of uptrend is present, there is no point for traders not to go all in.
Failing to understand a trend’s nature, many traders, especially the amateurs, leave a potentially strong trend just out of fear. They tend to be scared of a hypothetical reversal to appear and never miss even a mingy chance to exit a trend. Most times, those trends are still on the rise, and anyone can extract profit just by clinging to them.
However, even someone who doesn’t follow a trend can converge the idea of leveraging one with his regular approach. Having a proper perception of the market’s direction and the dominant side of the market is always gives an edge to a trader.
Various Market Phases
Before learning how to discern a trend, we need to know first what we are looking for. It should be noted that the market only can go in three directions: upward, downward, or sideways. The momentum and the lengths of trends always change, though the price only can move in one of those three directions.
How to Detect Trends while Trading in the Forex Market
In this article, we will only look into the process of identifying a trend. We will also look into some instruments that explain different aspects of the market.
Using the price chart
Most traders deploy candles and bars to inspect the price movement. They often overlook the efficacy of a line chart. A line chart is the simplest way to observe price changes, and it presents the market removing all the unnecessary noise and clutter. Try using the best CFD trading platforms so that you can study the line charts without any errors.
The objective of candles and other forms of the bar is to provide traders with detailed data on the current happening on a chart. Analyzing all the data provided by those bars are not even always necessary. The best approach for a trader will be detaching himself from those bars sometimes and use line graphs instead.
There is no doubt that bars are essential, and traders should never settle for ignoring them. However, as we are discussing finding a way to identify a trend and its direction, the line graphs are more reliable that contexts.
Highs & Lows
Many investors find themselves being in love with the process of debunking a trend analyzing the highs and the lows that the market provides. A typical scenario for an uptrend is that the market generates higher highs at that time. The buyers become the dominant side, and they push the rate of a currency higher. Like the highs, lows tend to be also higher due to the buyers’ early joining and purchasing the dips.
Conversely, during a downtrend, the highs and lows are both lower. The sellers achieve dominance, and they push the price lower and sell their assets earlier.
Moving averages are, without a doubt, one of the most popular instruments when it comes to identifying trends and their directions. However, to get the clearest idea of the market using moving averages, there are some crucial factors that traders should be aware of.
The size of a moving average highly affects the turning point of a movement. When a moving average is small, it’s more likely to give false signals by reacting immediately to trivial price movements. Likewise, a faster-moving average may make a trader leave a trend even when the trend is about to retain its momentum.
A slower moving average is the most credible among all types of moving average. However, a slow average may give a late-signal and make the trader have a late-entry.