Identifying Trend in Forex Trading

Trend indicators used in FOREX trading

This article will be directed toward those aspiring to learn the FOREX market or who are beginning traders.

Trend identification is one of the first steps that a trader needs to take before entering into a trade. This can be accomplished in several ones certain of which have varying degrees of usefulness depending on the time scale being used. Note not every method for determining trend is used by every trader, in final you need to find the method for determining trend that works best for you. 

Moving Average

Moving average come in various versions the ones I will use are Exponential Moving Average and Simple Moving Average. All you need to know is that these indicators create an average of price over a specified time frame. When determining trend using multiple moving averages is quit effective. The method I use is with Exponential Moving Averages set at 21 and 55 periods, this is just what I like other could be 12 and 26 or 20 and 50, etc. and I use a 200 Period Simple Moving Average. Lets look at an example for an upward trend, this also applies for downward trend but in opposite. First I look to see if price is above the 200 period simple moving average if it is this is my first indication that the market is in an uptrend. Next I look for a cross over of the 21 period exponential moving average above the 55 period exponential moving average. When these two condition are met I know that the market is up. The degree of separation of price from the 200 period simple moving average and the separation between the 21 and 55 period exponential moving averages indicates the strength of the trend. Great separation meaning a stronger trend. If as of these are really close together I the market is not really trending, but is range bound and flat. 

Another method for determining trend is analyzing pure price action. A trend is defined as a series of higher highs and higher lows for an uptrend and lower lows and lower highs for a downtrend. With this analysis the market maybe trending over the past couple of hours but not for the day. It is important to know what time frame you are trading in and look from trends within that frame of reference. For example if you are swing trading it is probably good for you to look at and take trades based of a 5 minute chart. Better would be to look for trends on an hour, 4 hour or daily charts. 

Remember it is always a good idea to trade with the trend. Trend identification should be one of the first things you do before entering into a trade. Find what works for you and stick to it.