The Ultimate Guide to Trading Trends in Forex
Trading trends in forex provides you with opportunities to identify the strong market direction and enter an order accordingly. With the help of technical analysis, trend trading also allows you to predict future price movements. In our article, we will understand how you can trade trends in forex and the necessary strategies.
What are trends in forex?
Trends refer to the average change in a currency pair’s exchange rate over a specific period of time. When there is a constant positive change in the currency pair’s exchange rates, it is considered an uptrend, and when there is a negative change, it is considered a downtrend. A change in trend occurs when the forex market has been trading in the same direction for quite some time. In such a case, a currency pair that has been trending upwards slowly starts decreasing in prices, signalling a change in the existing trend towards a downtrend. Changes in trend can be identified by analysing the moving averages of the currency pair as the change is directly proportional to the moving average values.
Types of trends
- A strong trend where the currency pair exchange rate is constantly rising, with buying pressure being more than the selling pressure. It does not have a high chance of price pullback, making it a good opportunity to open long trades.
- A healthy trend is when the buyers are still in control, but there is also significant selling pressure. Such trends have some level of price retracement along with the currency pair‘s average prices, giving traders the opportunity to not only open a long position but also trade short positions.
- A weak trend is where neither the buying pressure is high nor the selling, indicating a weak market. Such a trend has steep pullbacks, and you are recommended to hold onto your trades during such a time period.
How to identify a trend?
Trend trading strategies can help you identify a trend. The flow of the trend can be determined by analysing the closing price, opening price and the range between which the currency pair has been trending. If the currency pair’s trading range is on the high-value side, it indicates an uptrend. In this case, market prices continuously increase. You can enter a long position during uptrends making higher highs and higher lows. Similarly, if the range is on the low-value side, it indicates a downtrend. In this case, market prices continuously decrease. You can enter a short position during downtrends making lower highs and lower lows. There are also time periods when the market neither reaches a high level nor a low level. This is called a sideways trend when the market is trading around the same price level for a long period of time. This indicates the long-term traders to hold onto their existing positions, whereas short-term traders utilise the sideways trends to take advantage of the short-term movements.
Top trend trading indicators
Average Directional Index Indicator
The Average Directional Index (ADX) indicator provides values between 0 to 100 which help identify if there is a strong or weak trend. Based on these values, you can enter strong trends and stay away from weak trends.
- When the ADX indicator gives a value above 25, it indicates a strong existing trend.
- When the ADX indicator gives a value below 25, it indicates a weak existing trend.
Double Bottom Indicator
A Double Bottom indicator suggests a bigger change in the trend’s direction, indicating a new possible uptrend. It indicates that there has been a market momentum reversal from the precious down move in the prices, which is followed by another price drop to the same level. The third step after the first two price drops is a rebound or price correction, which results in a new uptrend. This helps you place a short order at the first price drop level and a long order at the second price drop level to benefit from the uptrend reversal.
Moving Averages (MA) works on the basis of finding the average price of the currency pair during a specific time period and comparing it with the existing price levels. The single Moving Average price line helps you identify trends in the following way –
- When the current currency pair price is above the MA line, it indicates an uptrend and signals traders to place more long orders.
- When the current currency pair price is below the MA line, it indicates a downtrend and signals traders to place more short orders.
Relative Strength Index
Relative Strength Index (RSI) indicator identifies market momentum and identifies overbought and oversold market zones. If there are more positive price movements, the indicator signals a strong uptrend, whereas if there are more negative price movements, it signals a strong uptrend. It also helps traders trade market trends by giving values between 0 to 100.
- Any value above 70 indicates an overbought market and signals a downtrend reversal, indicating traders to place short orders.
- Any value below 30 indicates an oversold market and signals an uptrend reversal indicating traders to place long orders.
Bollinger Bands help in recognising trends by measuring market volatility. It consists of three bands, the middle band, which is the simple moving average line, the upper band, which is two standard deviations above the middle band and the lower band, which is two standard deviations below the middle band. The closer the bands are to each other, the lower the volatility in the market and vice versa.
- When the current currency pair prices are constantly touching or trading around the upper band, it indicates a strong uptrend and signals traders to place long orders.
- When the current currency pair prices are constantly touching or trading around the lower band, it indicates a strong downtrend and signals traders to place short orders.
Moving Average Convergence Divergence (MACD) Indicator
The MACD indicator is one of the most used trend indicators that helps in measuring the market trend and momentum. It consists of a short-term moving average and long-term moving averages. A crossover between the two moving averages helps in identifying which type of trend exists in the market.
- When the short-term moving verse crosses the long-term moving average from above, it indicates an uptrend and signals traders to place long orders.
- When the short-term moving average crosses the long-term moving average from below, it indicates a downtrend and signals traders to place short orders.
Top trend trading strategies
Trendline Breakout Strategy
The trendline breakout strategy helps in identifying a price breakout before it occurs and provides you with the ideal price level to enter the market. In this strategy, all you have to do is wait for a price pullback during a continued uptrend, connect all the highs of the pullback to form a trendline and enter the trade as soon as the currency pair price breaks above this trendline. This will help in timing the trades along with the market trend. You can place a stop-loss order right below the trend line in case the market does not move in your favour. Similarly, as soon as the currency pair price closes below the trendline, you can exit your long order, as this will indicate a trend reversal. The trend reversal is confirmed when a higher low is formed after the first price break below the trendline, breaking its swing highs. This signals you to place short orders instead.
Ascending and Descending Triangles strategy
The ascending and descending triangle strategy indicates that the current trend is going to continue in the same direction for a longer period of time. This means if an ascending triangle appears in an uptrend, it signals a strong upward momentum in the market, signalling traders to place long orders. On the other hand, if a descending triangle appears during a downward trend, it indicates a strong downtrend in the market and signals traders to place short orders.
- Ascending triangles are formed by connecting the higher lows, which act as the ascending line, and higher highs, which act as a flat line.
- Descending triangles are formed by connecting the lower lows, which acts as a flat line, and lower highs, which acts as the descending line.
The stop loss order can be placed at the previous swing low during ascending triangle formation and at the previous swing high during descending triangle formation.
Counter Trend Trading Strategy
The counter-trend trading strategy is the technique where you can predict a trend reversal before it occurs and place an order opposite to the current trend. This strategy involves swing trading as it analyses multiple trend patterns to identify if the bearish momentum is more than the bullish momentum or vice versa.
- When trend patterns indicate a higher trend shift in an existing bear market, it determines that there is going to be a potential uptrend reversal, signalling traders to enter long trades.
- When trend patterns indicate a lower trend shift in an existing bull market, it determines that there is going to be a potential downtrend reversal, signalling traders to enter short trades.
Trading opposite to the current trend allows traders to benefit from both rising and falling markets through even minor price fluctuations. When a reversal is predicted well before time, traders can exit their existing long orders during an uptrend and short orders during a downtrend.
Catch a Wave Strategy
Catch a Wave is a strategy that utilises the short-term exponential moving average and long-term simple moving average to understand in which direction the market is trending. This, in turn, allows traders to trade the trend with the help of two types of market waves.
- An impulse wave is when the currency pair price is moving in the direction of the overall market trend.
- A corrective wave is when the currency pair price is moving contrary to the market trend.
In this strategy, you can count the number of pivots in each wave to predict if the currency pair will be moving against the market trend or along the market trend. An impulse wave will usually consist of five swings, indicating that the currency pair is moving in the market’s trend direction. It is formed by combining multiple bullish candles.
- If the market is in an uptrend, enter a long order to trade along with the trend.
- If the market is in a downtrend, enter a short order to trade along with the downward momentum.
A corrective wave usually consists of three swings, indicating that the currency pair is moving against the market’s trend direction. It is formed by combining multiple bullish and bearish candles, with the bearish candles being more in number. They indicate that the currency pairs will follow the trend they are currently in.
- If the market is in a downtrend, place a long order to trade against the market but along with the currency pair’s existing momentum.
- If the market is in an uptrend, place a short order to trade against the market but along with the currency pair’s existing momentum.
Trade with forex trends now
Use trend trading indicators and strategies to enter strong trends and stay away from weak trends. Trading in a trending market allows you to leverage the forex trading opportunities at the right time. Start trading with our forex trading platform today to get access to trend trading indicators and strategies. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
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