Forex trend indicator techniques to fall

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As a result, traders must learn that there are a variety of indicators that can help to determine the best time to buy or sell a forex cross rate. Here are four different market indicators that most successful forex traders rely upon. However, for most traders, the easier approach is to recognize the direction of the major trend and attempt to profit by trading in the trend 's direction.

This is where trend-following tools come into play. Many people try to use them as a separate trading system, and while this is possible, the real purpose of a trend-following tool is to suggest whether you should be looking to enter a long position or a short position. So let's consider one of the simplest trend-following methods—the moving average crossover. A simple moving average represents the average closing price over a certain number of days. To elaborate, let's look at two simple examples—one long term, one shorter term.

The theory here is that the trend is favorable when the day moving average in yellow is above the day average in blue and unfavorable when the day is below the day. As the chart shows, this combination does a good job of identifying the major trend of the market—at least most of the time. However, no matter what moving-average combination you choose to use, there will be whipsaws.

The advantage of this combination is that it will react more quickly to changes in price trends than the previous pair. In the end, forex traders will benefit most by deciding what combination or combinations fits best with their time frames.

From there, the trend—as shown by these indicators—should be used to tell traders if they should trade long or trade short; it should not be relied on to time entries and exits. Indicator No. But how reliable is that indicator?

As mentioned earlier, trend-following tools are prone to being whipsawed. So it would be nice to have a way to gauge whether the current trend-following indicator is correct or not. For this, we will employ a trend-confirmation tool. Much like a trend-following tool, a trend-confirmation tool may or may not be intended to generate specific buy and sell signals. Instead, we are looking to see if the trend-following tool and the trend-confirmation tool agree.

In essence, if both the trend-following tool and the trend-confirmation tool are bullish , then a trader can more confidently consider taking a long trade in the currency pair in question. Likewise, if both are bearish , then the trader can focus on finding an opportunity to sell short the pair in question. One of the most popular—and useful—trend confirmation tools is known as the moving average convergence divergence MACD.

This indicator first measures the difference between two exponentially smoothed moving averages. This difference is then smoothed and compared to a moving average of its own. When the current smoothed average is above its own moving average, then the histogram at the bottom of the chart below is positive and an uptrend is confirmed. On the flip side, when the current smoothed average is below its moving average, then the histogram at the bottom of the figure below is negative and a downtrend is confirmed.

When both are positive, then we have a confirmed uptrend. At the bottom of the chart below, we see another trend-confirmation tool that might be considered in addition to or in place of MACD. It is the rate of change indicator ROC. As displayed in the chart below, the orange-colored line measures today's closing price divided by the closing price 28 trading days ago. In the case of the illustrations above, that demand is drying up more quickly with each subsequent rally from trend line support.

Thus, we get a market that begins spending more time trying to keep its head above water than making higher highs. Of course, this concept also applies to a bearish trend where demand increases and supply decreases as prices drop. The EURUSD daily chart below is a perfect real-world example of a currency pair that began testing support more rapidly over the course of days.

Notice how each rally spent less time away from support as the trend became extended. We all know what happened next. The breakdown you see in the chart above was the starting point of the massive 3,pip drop that transpired over the next 44 weeks. If we want to get fancy, we can combine the two techniques we just discussed to further the conviction that a breakdown was imminent. I will be the first to admit that the pair was not making lower highs before the technical break.

However, the fact that a rising wedge formed indicates that each subsequent rally had less bullish conviction than the last. In some ways, this is a combination of the two techniques we just discussed. The idea of heavy price action is something my members have become very familiar with over the years. As the term implies, this is when a market begins to put constant pressure on a key level over a short period. I suppose I should come up with a better word for it since the word heavy only applies to a pair that is putting pressure on a support level.

At any rate, the idea here is to watch how the market responds to support or resistance within a given period. A typical period would be a few days or maybe a full week if trading from the daily time frame. If the market begins to cluster or group for an extended period at a key level, chances are the trend is about to break down and reverse. The illustration below shows what this looks like for a market that is in an uptrend. Notice how, toward the latter half of the trend above, the market began to cluster just above support.

This type of price action leads to a breakdown more times than not. It can, in fact, be extremely powerful on just about any time frame, even the 1-hour chart. Once again, notice how the price action became heavy toward the latter half of this ascending channel, a clear indication that the bullish momentum was not only tiring but that a break was imminent.

The result of the breakdown in the chart above was a loss over the next 30 trading days. Something as simple as the three techniques discussed above are all you need to gauge whether a trend is likely to continue or break down. Keep in mind that all three techniques above are as useful in bearish markets as they are in bullish markets. The charts and patterns above were only used to maintain a consistent theme throughout the lesson, but the techniques discussed above can be utilized in any market and on any time frame.

The best thing any trader can do for themselves whether they are attempting to decipher trend strength or identify key levels is to get back to basics. Every market has its story to tell, and every story can be translated using swing highs and lows.

As I often say, your job as a trader is not to know what will happen next. Rather, your job is to gather the clues the market leaves behind and assemble them in a way that stacks the odds in your favor; and every possible clue is born from the natural ebb and flow of the market. Frequently Asked Questions What is a trend in financial markets? A trend in Forex, the stock market, etc. It shows whether buyers uptrend or sellers downtrend are in control.

How do you identify trends? The best way to identify trends, in my experience, is to use simple price action. Higher highs and higher lows signal an uptrend, while lower highs and lower lows represent a downtrend. What are the three types of trends? A long-term secular trend is one that lasts for 5 years or longer. An intermediate primary trend is one that lasts for 1 year or longer. A short-term secondary trend is one that lasts for a few weeks to a few months.

What is the best Forex trend indicator? How do you identify a trend reversal?