In FX trading, learning to trade with the trend is one of the best ways to make money.
Fortunately, forex markets tend to have some of the strongest trends, offering a lot of opportunities for FX traders. It is, therefore, very important to learn how to find the trend in the forex markets.
Before looking at how to find the trend in forex trading, lets first of all talk about what forex trends are.
Why Do Trends Form?
The reason why trends form is simply because of an underlying supply-demand imbalance in the market.
With bullish trends, there is simply more buying pressure in the market than selling pressure, allowing price to continue to strengthen. The trend will continue until buying pressure fades and selling pressure builds, which brings the supply/demand balance back into equilibrium. This causes a contraction of momentum, leading either to a change in trend or causing the market to settle into a range.
With a bearish trend there is simply more selling pressure than buying pressure, allowing the market to keep falling. This will continue until selling pressure fades and buying pressure builds, causing a loss of momentum. This leads to either a change in trend or it causes the market to settle into a range.
When it comes to how to find the trend in forex trading, there are a lot of options.
However, the two easiest and most simple options are using trend structure and trend line.
A forex trend is defined as a period of price action when the market is expanding either higher or lower and is characterized by increased momentum.
A trend can either be classed as bullish, where price is appreciating (identified by higher highs and higher lows) or bearish, where price is depreciating (identified by lower lows and lower highs.)
Bullish Trend Structure
The above image shows a textbook example of a bullish trend. Price is moving higher in a well-defined sequence of higher highs and higher lows which form a classic stair-case type structure, something strong trends usually display.
Bearish Trend Structure
In the above image, you can see a textbook example of a bearish trend. Price is moving lower in a well-defined sequence of lower lows and lower highs which forms a classic stair-case structure.
Another way to identify a trend is to use trend lines. Trend lines are diagonal lines that you can apply to your MT4 charts to help you understand price movement. With traditional support and resistance lines, we draw lines across horizontal price points to connect highs and lows.
However, with trend lines, we draw lines diagonally to connect rising or falling price points along a diagonal gradient. Doing this helps us understand whether the market is moving higher or lower. These can be a really quick way of assessing which way the trend is in the market (or if there is a trend at all!)
How To Draw Trend Lines
To use trend lines, simply establish an initial price point, which for a bullish trend line is usually the main low. Then connect it to the next rising low to establish your trend line. Price should hold a third touch of the trend line to validate the trend line.
Bullish Trend Line
In the image below you can see that we have a classic bullish trend line connecting rising price points, indicating that the market is moving higher.
Bearish Trend Line
For bearish trend lines, we simply do the opposite: connect falling price points. So, we start by applying our trend line to the first price point (usually the high) and then to our second price point (a lower high) and then this establishes our trend line. Again, we look to see if the market holds a third touch, validating our trend line. You can see this in the image below.
Multiple Trend Lines
Sometimes, we can draw more than one trend line. In the image below you can see that we have added a second trend line to our chart. This helps us see if the trend is strengthening or starting to lose momentum.
No Trend Line? No Trend
Similarly, if we open a chart and we are unable to find a trend line to draw, this likely means that the market is in consolidation mode and there is no trend. So, when this is the case, simply wait until price makes a move and you are able to draw a trend line or look at another chart.
Remember, each market usually spends only 20% of the time trending and the rest in range so it is always good to look at many different charts for opportunities.