Forex trend analysis
Trend is a directional tendency of price change, limited by time intervals, which makes it the major instrument of technical analysis. We see trends, when the price moves consistently in one direction. If the direction is lower, then the trend is considered to be bearish, and if the direction is higher the trend is considered to be bullish. In defining a trend it is important to ensure that price peaks and troughs are pointing in the same direction. In a bearish trend the price highs and lows should be moving lower as well as in a bullish trend price highs and lows should be moving higher.
Here are the main terms of trend analysis:
* Trend Line: When a trend occurs, in many cases it is possible to draw support lines under an uptrend or resistance lines above a downtrend. It is considered that once these lines are broken that the trend has completed. This implies that it should result in a correction at the very least and possibly a reversal in the trend.
* Trend-Following: A trading technique where the trader looks for a major trend to begin and holds positions in the direction of the trend.
* Trend Reversal: A change in the direction of market prices. Trend reversals often follow a 4-step pattern. The market makes a new high. The trend line is broken and the market makes an intermediate low. The next rally does not exceed the previous high. Prices subsequently break the previous low. Popular trend reversal patterns include Double and Triple Tops and Bottoms, and Head and Shoulders patterns.
* Trend Channel: Frequently price trends develop between two parallel trend lines, reacting at the channel highs and lows. Once the channel is broken the trend lines reverse influence - i.e. a channel support line, when broken becomes resistance and vice-versa. An approximate target for a price reaction will be the vertical width of the channel projected from the point of break-out.
* Trendless: Sideways price movement with no clear direction.
On the forex chart, it is the simplest and most convenient in all the technical analysis to draw a trend line.
Upward trend:
Downward trend:
Sideways trend:
As most of us know - the market trend is consisted of three stages:
1. The first is the initial stage where the market trend is shaped up.
2. The second one is the developing stage where the trend is strongly kept as it is.
3. The last one is final stage where the forex market begins to suggest the next new trend on a certain turning point.
You can find the clear trend nearing to the final stage as long as you make use of the moving average, because it is coming later than the market movement. It might be fear that you would buy at the highest or sell at the lowest if you missed capturing the market trend accurately.
Current computer technologies allow tracking of weekly, daily, hourly, minutely and instant price changes in the market. For analysis of short intervals (less than one hour) methods of technical analysis also can be used. However, it needs to say that reverse moments on such charts have a short-term effect and do not influence much on the long-term tendency. Besides that, trading within ultra-short intervals is exposed to psychological and instant reactions at a greater extent. All this leads to a higher instability of price charts for shorter periods, as compared with charts for longer periods. For technical analysis, the most popular are daily (D1), hourly (H1) and five-minute (M5) charts.
This concludes that we should capture the market trend at the initial stage in the forex market, but it seems quite hard to find it out as you think. It is because the older trend continues just before the new trend is born out as the forex market keeps older status.
You can find the turning point of the market trend to some extent by referring to the patterns of tops and bottoms, but it does not necessarily ensure that the new trend should be generated. It needs attention that a certain box range trading continues after the big wave in line with the market trend.