We have already established in our previous blogs that trends are really useful for speculating price movements and spotting possible trading opportunities. But in order to trade the trend, we need to know its direction. So how do you ascertain the direction of a trend?
For that first, you need to establish what kind of trade you are: swing, day, or position trader. If you’re in the market for a long position then it would prove beneficial for you to analyze charts with longer timeframes. Whereas, charts with short timeframes would be better for intra-day trading.
With charts as a reference, we can utilize any number of technical indicators to gauge the direction of trends. While analyzing charts for trend trading our first priority must always to be determine trends rather than focusing on entry and exit points. To do so look over the price chart to establish which direction the price is moving. If it’s going up, then confirm the trend direction by finding a string of higher highs and higher lows.
And as always this trend will end eventually. As part of a trend reversal, the uptrend could change to lower highs and lower lows leading to a downtrend. So always be on the lookout for both, and validate your claim by a series of highs and lows. If you’re unable to corroborate the trend with evidence, look for another obvious choice. Try to find trends in the price movements instead of fitting the market to your insinuations.
Another major factor to consider while trend trading is the currency pair you choose. Although, there endless options out there, not every pair will be suitable for trend trading. For instance, USD/KRW or cross pairs are more suitable for range trading. If you’re looking for trend trading then you could have a better chance with USD/EUR, USD/GBP, USD/JPY, and USD/CHF. These are the most sought-after currency pairs with high liquidity.
Traders utilize an array of trend indicators to establish and confirm trends. The most common one is price action. It is the price movement of a currency pair over time and the basis for all technical analysis. Another widely used indicator is the moving average. It is used to determine the average price for a specific period of time. And moving average indicator also depicts the strength of a trend. These are just two of the bunch; there are many trend indicators available such as MACD, Parabolic SAR, etc. And you can use any number of them to figure out market trends. But just remember you need practice and patience to actually make use of tools accessible to you.
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