Surely you have often heard the statement that you need to trade only along the trend, skip the flat and any incomprehensible areas on the chart? This is largely true, but then the question arises, how to determine the direction of the trend? In fact, there are several ways, we will get acquainted with the most effective in this article.
First, let’s define the concepts. On Forex or any other exchange, binary options, cryptocurrencies and others, trend – this is the main, pronounced trend in the direction of the price. In other words, trend and trend are synonymous. On the Japanese candlestick chart, the trends are as follows.
Those areas where the main trend is clearly visible is the trend.
Each timeframe has its own trend, you will see this if you start switching them, the main direction of the price for them may differ. A trend that has arisen on higher timeframes is called long term, for the younger ones – short… If you trade within the day, then you will be more interested in the short-term, but if you trade on 4-hour charts and above, the long-term.
You’ve probably heard the expression “Trend is your friend” often. This is a common saying among traders and it is absolutely true. Indeed, it is much easier to make money in a trend, you need to open a position and hold it as long as possible. At the same time, which is very important, the rules of money management are also very easy to follow, you will have a good risk to reward ratio, since your stop loss will be small and your take profit will be large. Once you get used to it, you can maintain a ratio of 1 to 5 or even higher!
But in order to achieve such indicators on Forex, you need to be able to determine the trend. And read on for how you can do this.
How to identify a trend without indicators
There are two main techniques: manually or using indicators. Let’s start with the most effective manual techniques.
Visual assessment of the graph
Yes, in most cases, a simple visual assessment will give you an idea of the main trend, the direction of price movement. Some traders prefer to use a simple line chart for this, since what is happening on the market looks concise and more understandable on it.
As you can see, in principle, one glance is enough to assess the direction of the trend.
Along trend lines
- The easiest and most effective way is to use trend lines. But, you need to know some simple nuances of how to build them correctly, so read the article at the link provided. It is important to be able to do this, because trend lines can be used to determine the trend reversal.
Important points are marked with numbers:
- #1 – upward trends
- #2 – downstream
- #3 – the moment of the trend change. It is determined by the breakdown of the line.
This is a very efficient way. Once again, read about all the rules for working with this tool here, a video tutorial is attached.
These are the two main manual methods that most traders use. They have proven to be effective, so feel free to use them too.
Determining the trend by indicators
Indicators are an indispensable assistant for a trader, so it’s no surprise that there are many tools for our task today – determining the trend. Here is the top of the most popular indicators for this. We have detailed articles about all of them, be sure to read them in order to choose the tool that you like.
The king of indicators is the moving average, which is probably the most commonly used to determine the trend. Choose a medium period: small periods, from about 8 to 20, determine the short-term trend, and large ones (from about 20 and above) define the long-term.
Where the moving line is directed – there the trend is. If it is horizontal, then the market is sideways and there is no trend. The simplest method for determining a trend and reversals by moving averages is the moment when the price crosses it. When the candlestick closes above the MA, the trend changes to an uptrend, when below it, to a downtrend.
Another well-known indicator installed in any Metatrader terminal. It draws points above and below the price, and at these points we find the main trend. When the dots are above the price – the trend is downtrend, below the price – the uptrend. The points themselves are also dynamic levels of support-resistance, by the way, this also applies to movings. The moment of the trend reversal is determined here either by the change in the position of the points:
- were on top, became below – the trend became upward
- were from below, became from above – descending
Or we can use the moment when the price crosses the points, by analogy with movings. Here everyone decides for himself and choose the method that is easier and more pleasant for him.
Bill Williams’ alligator
The Alligator indicator of the well-known exchange guru Bill Williams works in almost the same way as movings, because they underlie it. But the method for determining the trend for this indicator is somewhat different. When all the lines are directed up or down, are parallel to each other and not intertwined, the trend is directed there.
If the lines are intertwined, there is no trend. A trend reversal occurs when the lines line up in parallel in one direction or another. The principle, as you can see, is simple but effective.
The Fractals Indicator is another of Bill Williams’ indicators, which is successfully used in Forex. It draws multidirectional arrows on the chart. There is even a simple Alligator and Fractals trading strategy. Here we can find the trend by the tops of the arrows, mentally or using the terminal tools along them.
The moment of the trend change is most often determined by the breakout of the last Fractal directed against the price movement. So, if the trend was downtrend, then for its change it is necessary that the price breaks through the level of the last Fractal upward (the last upward arrow). But for the descending one the opposite is true.
These are one of the most popular indicators by which you can quickly and easily determine the trend in Forex.
How to determine the strength of a trend in Forex
Strength here refers to the likelihood that the trend will be continuous and without significant pullbacks. After all, every trader wants to catch just such a trend at all costs, since the profit here is significant and fast. This can be done in the same way in two ways – visually and using indicators.
To determine the strength of the trend visually, you can use all the same tools that we talked about above. First of all, this is the trend line. The more steeply it slopes, the stronger the trend.
Moving averages will also help with this. Here everything is the same – we judge the strength of the trend by the angle of inclination.
And one more indicator, which I would like to advise to assign the function of determining the strength of the trend – ADX, read the detailed review. This indicator shows the direction of the trend and its strength, which is determined by the distance between its lines.
There is nothing difficult in determining the direction of the trend in Forex. You can use auxiliary indicators or do it manually. The trend is the very time when it is easiest for traders to earn a solid profit. It is enough to follow the “Buy and hold” tactics (or sell and hold, depending on the trend) And the difficulty, in fact, is to trade with discipline, study the psychology of trading, learn to hold a profitable position and quickly close a losing one. And we will definitely continue to disclose these topics on the pages of the site.