Trends in the currency markets are one of the most important and basic elements to trading. Incorrect recognition or interpretation of trends can have a devastating effect on traders. At some point in your investing career, you are most likely going to hear the cliche “the trend is your friend”. While this statement is true and seems simple enough, actually identifying a trend can be deceptively tricky–especially if you are new to technical analysis. And of course, the trend is only your friend if you can properly identify it.
The trend is the observable direction of the market – up, down, or sideways – and, by acting in concert with the market trend, we significantly increase our odds of success. Given the understanding that the psychology of the markets actually moves the markets, we can acknowledge that psychology develops and ends the trends we are going to look at today. Learning how to identify the trend should be the first order of business for any student of technical analysis.
A forex market trend occurs when the price of a currency pair moves in an identifiable direction over a specific period. The moving average of the price of a currency pair is one of the best trend indicators. A moving average is the average of a specific number of currency pair prices that changes with time. For example, a five-day moving average is the average of the last five days; on the sixth day, the first day is dropped from the calculation of the average. If a moving average is climbing, the trend of the market is generally climbing; when a moving average is falling, the trend is usually declining.
Technical analysts have come up with many different ways to identify a trend. Some look at how moving averages are interacting with each other, some look at technical indicators that have been specifically created to identify trends. Currency pairs rarely move straight up or down. In other words, they move up and down and up and down but ultimately move higher or lower. Whenever a currency pair moves up and then starts to turn around and move back down, it creates a new high–or a peak. Whenever a currency pair moves down and then starts to turn around and move back up, it creates a new low–or a valley. You can use these highs and lows–or peaks and valleys–to help you determine the trend.
Markets are made up of several different kinds of trends, and it is the recognition of these trends that will largely determine the success or failure of your long and short-term investing. By combining the moving average diagnosis with the pivot count and then fine-tuning the analysis with an observation of candle patterns, a trader can stack the odds of making a successful trade in his or her favor. Remember trading is a craft, which means that it is both art and science and requires practice to develop consistency and profitability.