How to determine the trend in forex?
Some people learn from their mistakes, but smart people learn from other people's mistakes. So let's start with examples of a wrong but very common approach to market trend analysis.
What you see in this chart is explosive price movement that is usually the result of a news release. All brokers, platforms and various currency tools are indicating a “strong uptrend”, tempting people to jump in and make a profit.
What happens next is, at best, a choppy zone, or a hard fall.
What is actually in the chart are a few consecutive long green candlesticks.
This is not a real trend, but immediate price action, tempting traders to initiate trades and experience a costly and painful exercise. To avoid falling into this trap, you need to focus on longer trends. This is what a real trend looks like:
The price is consistently rising with no sudden changes or explosive movements. You can expect that this trend will continue and you should take only bullish signals. Obviously the trend won't last forever and you can even have bad luck by entering the market at the end of the trend, but the odds work for you. It simply cannot be better. There are 100s of free or proprietary indicators to identify the trend but believe or not, no indicator is better than the human eye. As Albert Einstein said:
“Make things as simple as possible, but not simpler.”
Now let's reveal the easy but the most effective method to identify the trend.
1. Zoom the chart in/out to show about 200 bars. Notice that 200 bars on daily chart (or 200 trading days) correspond to 1 year.
2. Connect the lower left corner with the upper right corner. If the line overlaps with the price bars several times (the more times, the better), you have found a reliable uptrend. See the example below.
3. Connect the upper left corner with the lower right corner. If the line overlaps with the price bars, you have found a reliable downtrend.
As you see, the market is like a sea wave and it keeps on going up and down. Sometimes the dips are too deep to consider it a reliable uptrend, or the rallies are too high to consider it a reliable downtrend. Knowing the “trend reliability” is the key to discover the real and reliable trend. So, how do we determine if the trend is reliable, or whether it is better to stay off? The best way is to forget
any lagging indicators, but to use pure price action.
Read What is a trend drawdown?
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