on the Forex market
Novotrend is designed for those just starting out.
acquaintance with the foreign exchange market
The concept of a trend in trading"
Financial markets can move in different directions. One of the most basic and overlooked rules is trading in the direction of the prevailing trend or trend. Today we will analyze how to identify the current trend, as well as how to use it wisely.
Why a trend is every trader's friend;
How to determine if the market is in a downtrend, uptrend or sideways trend;
How to draw a trend line on a chart.
One of the most popular quotes in trading that you may have already come across: "The trend is your friend." This means that you need to follow the path of least resistance, trade in the direction of the trend.
Imagine a wave moving towards the shore. The simplest thing a trader can do is to climb the crest of this wave, not swim against it.
Of course, the trend can change at any time, but you can use technical indicators to try to pinpoint at what point the trend can change its direction.
Up, down, to the side
All financial markets move in two different directions: up or down. When there is no pronounced trend in the market, then there is a flat. At this point, prices are trading in a horizontal range, there is no definite direction of movement.
Correct trend definition will greatly help you in trading. There are 3 types of trend in total:
- Upward trend;
- Falling market;
- Flat or side market.
If the market is growing, then you can consider buying, that is, trading with the trend.
The most correct moment to buy on an uptrend is a local short-term price drop: the lower you enter the market, the lower the risks and the higher the potential profitability.
It is important to remember that in an uptrend, dips are short-term, they do not differ in large amplitude. In this regard, a long wait and a cautious approach to trading may result in lost profits for you.
An uptrend or bull market shows a series of higher highs and lows. In other words, over time, the market falls less and more and more.
If the market falls, then you can consider selling. In order to open the most profitable trade, you will need to enter the market as high as possible, this way you will earn a big difference.
A downtrend or bear market creates lower lows and lower highs. The market grows less and less and falls more and more.
Flat or side market
When there is no pronounced trend in the market, then a flat can be observed. A distinctive feature of a flat is the coincidence of lows and highs, that is, the market unfolds at the same points. The most profitable trading strategy in such a situation is based on the use of support and resistance levels, which you will learn about in the next lesson.
As you can see from the example below, EUR / USD was trading sideways before the downtrend was established. Sellers prevailed over buyers, which led to lower prices.
How to identify a trend?
Traditionally, technical analysis relies on price lows and highs to determine a trend. An uptrend is characterized by the fact that each low and high on the chart is higher than the previous one. If we connect the price lows and highs with a line, we will see an upward movement.
A diametrically opposite situation with a downtrend, each low and high is lower than the previous ones. After drawing a line through all the lows and all the highs, we will see a downward movement.
We use graphical tools to determine the trend. By drawing a line through the lows and highs of the price, we can determine the trend.
Trend and timeframe
One of the most important things in determining a trend is the time frame. When it comes to a long-term trend, you will use larger time frames such as a month or a week.
However, for trading within a day, short time frames are of great value. Large commercial traders may be interested in the fate of a currency or a company for months, even years. But for ordinary traders, the weekly chart can be used as a "long-term" reference point.
Ride the waves of the trend
Trend analysis is based on historical price movements. This means that traders look to the past to predict the future. Knowing the direction of the trend can help you take profitable trades, but keep in mind that markets tend to move in waves. This must be taken into account.
For example, we are observing an upward (bullish) trend, the behavior of which can be characterized by sharp and large upward movements - this is an impulse or trend movement. Slow and small falls are corrections that tend to go in the other direction of the trend. If you want to open a long position by buying an asset, then it is most correct to do this during a correction.