In the first part of our series on how to find the trend in forex, we looked at some basic ways that you can identify a trend in forex using price action and simple trend line techniques.
For FX traders new to the forex markets, it is very beneficial to learn how to trade with the trend. In fact, the methods discussed in that article will help you learn the foundations of such a practice.
Once you are ready to take your trend trading to the next level, you need to understand how you find strong trends in forex.
When it comes to finding strong trends in forex, FX traders can benefit most from using technical indicators. These are very useful in giving us information about the forex market.
Read on as we discuss how to find strong trends in the forex markets.
One of the best indicators for looking at the strength of the trend in forex is the MACD indicator. This indicator looks at the difference between a short and longer-term moving average to identify whether the trend is bullish or bearish. Best of all, the indicator also suggests how strong the trend is via the size of the bars in the histogram.
In the image above you can see an example of how the MACD works. The first red vertical line marks the point at which the indicator turns bearish, moving below the horizontal centerline. From here you can see that the indicator remains below the line, reflecting a bearish trend. You can also see that the size of the bars in the histogram gets larger showing that the trend is strengthening.
You can see that after a while, however, the bars stop getting big and actually start to reduce in size. This creates a divergence highlighted by the rising green trend line on the indicator.
The bars getting smaller tells us that the move is losing strength. Soon after, you can see that price stops trending lower, ranges for a while and then starts to reverse higher before moving up to the point where the indicator turns bullish. This is highlighted by the second vertical red line.
As you can see this indicator is extremely useful for identifying the trend, as well as highlighting trend strength. This can also let us know when a trend might be ending, which is very useful for trade management.
Another very useful indicator is the Bollinger bands indicator. Bollinger bands show a 20 period moving average with upper and lower lines (which form the bands) that are two standard deviations above and below the average.
When the bands are moving higher or lower, this dictates the trend and widening bands show a strengthening trend. Narrowing bands, on the other hand, show that a trend is weakening.
In the image above you can see that the first red vertical line marks the point where the Bollinger bands shift from moving sideways and being very narrow. This shows that price is in range, to moving lower, reflecting a bearish trend.
You can see that the bands get wider as the trend strengthens, up until the point at the second red vertical line where the bands contract again and move sideways. This shows that the market has gone back into range.
Bollinger bands are another fantastic indicator for helping FX traders determine not only the direction of the trend but also the strength of the trend.
Learning how to read strengthening/weakening trends in forex is a crucial part of becoming a successful FX trader. And these two indicators are two of the best forex technical indicators to get you started!