How to Correctly Identify a Trend Direction on Forex Charts [7588]

Every trader wants to know how to identify trends – Trend analysis is only one part of the overall trading strategy all professional traders employ to enter and exit trades. Yes, it is never a good idea to enter a trade based on one factor alone.

When a market is trending, it is predominantly moving in one direction – either up (Bullish) or down (Bearish).

As a trader, fighting against the trend can lead to unnecessary losses and can make achieving good risk-reward on your trades a lot more difficult.

It is also important to have reliable ways to identify the trend because markets can also move into a ‘range’, whereby they are not predominantly Bullish or Bearish but are chopping sideways.

There are three very simple techniques that I will show you today that, with enough practice, will make determining trend strength a much more manageable task.

Being able to spot trends and ranges can seem daunting when you are looking at live charts, but it doesn’t need to be that way.

There are three very simple techniques that I will show you today that, with enough practice, will make determining trend strength a much more manageable task.

Let’s get started!

 

A Bullish trending market is a market that is increasing in price over time. The definition of a Bullish trend is a market making higher highs and higher lows.

Once you have drawn in the obvious swing points on the chart, you can then determine if the market is making HH and HL or LH and LL: HHHL – Higher Highs and Higher Lows, LHLL – Lower Highs and Lower Lows.

A Bearish trending market is a market that is decreasing in price over time. The definition of a Bearish trend is market-making lower highs and lower lows.

Moving averages (MA) are one of the most popular and often-used technical indicators.

The simplest way is to just plot a single moving average on the chart. When price action tends to stay above the moving average, it signals that price is in a general UPTREND.

If price action tends to stay below the moving average, then it indicates that it is in a DOWNTREND.

In the screenshot below we used the 50 EMA which is a mid-term Moving Average.

You can see that during an uptrend, price always stayed well above the Moving Average and once price has crossed the Moving Average, it entered a range.

In a range, price does not pay too much attention to Moving Averages because they fall in the middle of the range, hence average.

If you want to use moving averages as a filter, you can apply the 50 MA to the H4 or Daily timeframe and then only look for trades in the direction of the daily MA on the lower timeframes.

Determining the direction of a trend doesn’t need to be a complex operation.

Something as simple as the two techniques discussed above are all you need to gauge whether a trend is likely to continue or break down.

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