The key to making money in forex is identifying trend and trading with it. Trends tell you where prices will most likely be going in the future.
If the trend of a currency pair is pointing up, you need to buy the currency pair to make money.
If the trend of a currency pair is pointing down, you need to sell the currency pair to make money.
If the trend of a currency pair is pointing sideways, you either need to alternate between buying and selling or wait until the trend points up or down to make money.
Whatever you do, never fight the trend. It will be an expensive battle if you do.
Trends do not move straight up or straight down. They usually move in one direction for a while and then retrace part of the previous movement before turning back around and continuing on the previous direction.
Every time a currency pair turns around and begins moving in the opposite direction, it forms a new high or a new low.
Identifying these highs and lows allows you to identify whether a currency pair is in an uptrend, a down trend or a sideways trend.
Up trends-
Currency pairs that are trending upward form a series of higher highs and higher lows as shown below.
Down trends-
Currency pairs that are trending downward form a series of lower highs and lower lows, as shown below.
Sideways trends-
Currency pairs that are trending sideways form a series of highs that are at approximately the same price level and a series of lows that are at approximately the same price level, as shown below.
Trends, whether they are up trends, down trends or sideways trends, can form over various time periods. Identifying the following trends over each time frame and being able to align them in your analysis is crucial to your success as a forex investor:
Long Term Trend:-
Fundamental factors are the major drivers of a currency pair's long term trend.
Long term trends, sometimes called major trends, are those trends that have dominated a currency pair for the longest period.
Looking at the daily chart below, you can see that the currency pair has been rising in an up trend from left to right - notice the series of higher highs and higher lows as time progressed.
Seeing this price action should give you a bias toward buying. If the currency pair had been in a long term downtrend, you would have a bias toward selling.
Intermediate Trend:-
Intermediate trends, sometimes called minor trends, are more responsive than long term trends because they cover a shorter period of time.
These trends are also affected by fundamental factors. However, interest rates do not dominate intermediate trends like they do long term trends.
Other fundamental factors carry equal weight in their affact on intermediate trends.
Looking at the chart below also, you can see that the currency pair was in a sideways intermediate trend during the highlighted time frame - notice the series of level highs and level lows as time progressed.
Seeing this price action, it should tell you that while your bias is bullish, you may want to wait to buy the currency pair until you see the intermediate trend move upward - in line with the long term trend.
Short Term Trend:-
Short term trends, sometimes called micro trends, are more responsive than both long term and intermediate trends because they cover the shortest period of time.
These trends are the most volatile trends and are predominantly affected by the news of the day. It is not uncommon to see these short term trends change direction extremely rapidly.
Also, looking at the chart below, you can see that the currency pair was in a down trending short term trend during the highlighted time frame - notice the series of lower highs and lower lows as time progressed.
Seeing this price action should alert you that you may have to change your bias toward buying the pair in the future. However, since it is the only the short term trend, you should not abandon your bullish convictions toward the currency pair just yet.
In this example, the long term, intermediate and short term trends are in conflict. You should not trade when the trends are in conflict. Instead, you should wait until you can align the trends from each time frame.
Aligning Trend Time Frames:-
Your most profitable trading opportunities will come when the long term, intermediate and short term trends all line up in the same direction.
When the long term, intermediate and short term trends are all moving higher, it is an excellent time to buy the currency pair.
When the long term, intermediate and short term trends are all moving lower, it is an excellent time to sell the currency pair.
You can see in the chart below that the trend for each time frame has been moving higher for quite some time. Had you purchased this currency pair and held it through this rally, you would have made a large profit.
Understanding trends is only half of the basic technical analysis picture. To complete the picture, you also have to understand the concepts of support and resistance.
The next article will be on the concepts of support and resistance.
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1. www.agea.com/?gid=53541
2. www.instaforex.com/en/index.php?x=LGYM
Good luck!
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