AtoZMarkets – Forex industry experts say: trading with the trend is like trading with the flow. When the trend is directed upwards, why would you choose the go against it and seek for short entries, while going long might result in much better trades?
5 easy ways to identify trend direction
Some of the Forex beginners are trying to forecast price reversals even when the trend is last for long. Instead, they could just follow the trend and get much smoother trades.
Here one can say that trend following is not always the best strategy. However, you can find a compromise: combine the concept of trading with the higher timeframe trend with your usually trading strategy.
For instance, you start on the daily timeframe and identify the direction of the trend. Afterward, you use this information on your lower timeframe to time your trades. In order to be able to accurately predict the price action, trend and its direction, we will look into 5 easy ways to identify trend direction.
Before diving into the discussion, it is necessary to clarify what we are looking for. Generally, the market trend can be moving up, down, or sideways.
The chart below is representing the three possible cases and how markets are changing according to the phase. The key challenge here is to find out what is currently happening in the market in the real time.
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In order to do this, we will go through 5 easy ways to identify trend direction.
Chart 1: 5 easy ways to identify trend direction
Line graph method
A lot of traders only use and candles, while observing charts, less of them use line graphs. However, the line graph is a very simple, yet practical tool that allows the trader to look at the bigger picture at the chart.
Where the bars and candles are providing specific details about the price action, like a number of pips, the line graph is here for you to aid you in identifying the overall trend.
Chart 2: easy way to identify trend direction (line chart)
Once in a while, it is very useful to zoom out and switch to the line graph to get the bigger picture of the market. As a matter of fact, the line graph is the perfect way to start your identification of trend direction, especially if you use the higher timeframe.
Highs and lows
Some industry experts swear by the way of analyzing charts. They believe that it is very simple and easy to understand. The traditional technical analysis implies that during an uptrend the chart keeps showing higher high and higher lows.
Chart 3: easy way to identify trend direction (highs and lows)
During the downtrend, we witness lower highs and lower lows. I have discussed various ways How to profit from the downtrend in Forex in one of my previous articles.
Moving on to the next method of our 5 easy ways to identify trend direction, let's look into moving averages.
Moving averages are among the top trend identifying tools in the market. They are also one of the most popular trading tools among Forex traders. However, there are some points that you need to know before you start analyzing trend with moving averages:
- the length of the moving average can be highly influenced when you get a signal of the trend reversal;
- a small, or fast, moving average may provide a lot of early and false signals since it reacts too soon to even small price movements. On the contrary, a fast moving average can get you out too early, when the trend is about to reverse
- a slow moving average may give the signals too late. It also can help you ‘ride’ trends longer.
Chart 4: using moving average to identify trend direction
In case you want to use moving averages as a filter, utilize the 50 MA on the daily timeframe. Afterward, look for trades in the direction of the daily moving average on the lower timeframes. Alternatively, you can also combine 20 and 100 SMAs on hourly time frames as well.
Trend lines and channels
Channels and trend lines are one more great way of identifying the direction of the trend. Moreover, they can be of a good help when understanding the range markets.
Chart 5: using trend lines to identify trend direction
Where moving averages and the high and lows analysis can also be utilized during the early trend stages, trend lines are more suitable for later trend stages. This is due to the fact that you need to have at least two touch points to draw a trend line. In addition, trend lines can be combined with MA in order to have the different angle of view on the market.
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The ADX Indicator
The ADX indicator is displaying the strength of currency pairs’ trend (also see Currency correlation strength indicator), rather than the strength of weakness of a currency pairs’ price action. This implies that the ADX indicator is direction indifferent. It is only measuring whether the pair is trending or is moving sideways.
The ADX indicator comes with three lines: the +DI line which shows the bullish strength, the -DI line which shows the bearish strength, and the ADX line which tells you the strength of the trend.
The higher the reading of ADX, the stronger the trend is. When the price begins to move sideways, the ADX indicator’s reading drops below 25. Then, when the price is moving in some particular trend, the ADX climbs to 25 and above. ADX below 25 could also mean no trade for you if you want to just follow the trend.
Should start trading with the trend on your own at all?
Before you start trading with the trend, you'll want to read this.
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Do you have something to add to these 5 easy ways to identify trend direction? Let us know in the comments section below.