Today we’re going to keep things a little simple. We’re going to trade trends with price action analysis. Now I know I’ve twisted your brain cells lately with the pin bar, inside bar, e.t.c This time we’re going to play with the trends. We’re going to learn how to ascertain when a market is trending and how to trade these trends .
What In The World Is A Trend?
Some of you may be wondering. “What in the world is a trend?” Well, in the forex world, a trend is a hot point of confluence(That word again) which increases the probability of a trade. It provides general information about the direct of the market. Now there are three types of trends. They are:
- The uptrend
- The down trend
- Horizontal or Sideways Trend
The uptrend is a series of peaks and valleys reflecting the rise in a currency pair. And it is categorized by a higher high(HH) and higher low(HL). The NZD/USD daily chart below illustrates this point
The downtrend is the complete opposite of the uptrend. Here the price of the currency pair takes a dip. reflecting a decrease in value of the currency. The downtrend’s slide is reflected in lower highs(LH) and lower lows(LL ),a s is illustrated by the diagram below.
Horizontal or sideways trend is slightly trickier. In this scenario, there very little up and down movement in the market. The trend’s direction may not be clear-cut, but in an anticipated event, it helps explain whether the chart will rise , go lower, or remain stable.
Now that we’ve gotten the basic introduction out of the way, here is something you need to keep in mind when trading trends.
Identify Trends With Only Price Action
You can only identify trends with only price action. Those fancy indicators which clutter your screen will only add to your confusion and frustration. You’d be better off observing the market swinging from left to right rather than zillions of lines which will make you pull your hair out. In fact watching the market swing from left to right is the most effective way of identifying a trend and spotting high probability trades.
The most fundamental method of identifying a trend is to determine whether a market is maintaining a consistent pattern of higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend. There is no need for any fancy trading systems or silver bullets here. Let’s take a look at a diagram below which illustrates what we’re talking about.
This diagram gives us the basic idea of looking for highs (HH) and higher lows(HL) for up trends and lower highs(LH) and lower lows(LL) for downtrends. If you notice each intersection between a higher high and higher low on the uptrend, and each lower high and lower low on the downtrend is considered what is called a swing point or turning point. These swing points are the first sign of whether a market is trending .
If you do not see HH HL or LH LL, then most likely, the market is moving sideways. And when such movement persists, you’re looking at a range-bound market or a market chopping back and forth.
If you’re not sure about your price action trading, get back to What is Price Action Trading?
Character Traits of Trending Markets
Just like we humans, trending markets also have character traits. Trending Markets tend to follow the direction market followed by periods of recess or consolidation. After recess, they resume following the direction of the trend. Basically traders make a profit while the trends are hot. They then take a breather and consolidate. It’s during this period that a lot of traders lose most of the profits they’ve made when the trend was strong.
The moral of the story is you need to identify parts of the trend that will help you save your money as opposed to blowing it away during the consolidation periods. Let’s take a look at an example of this scenario.
As you can tell from the diagram, the market is moving sporadically in the direction of the trend . It then pauses for breath before resuming its journey. Take note that not all trends are the same, but this is a typical description of a strong move by the market followed by a period of consolidation or retracement as it’s commonly known.Now in an uptrend, these swing points are known as support and in a downtrend, they are also known as resistance. The very first diagram pretty much captures what we’re talking about. Now let’s look at another diagram, but this time with support levels.
Here we see a huge trail pattern by these swing points As the market retraces to these support levels, watch out for possible price signals near these levels.
If you’re not sure about identifying support and resistance levels, read up on Identify Support and Resistance Levels with Price Action Analysis
Well, that’s a wrap on “Trade Trends With Price Action Analysis.” As you can see trend trading is a very easy way to make money in the forex markets. However, markets dont always trend the same way. And it is during this period of flux that you risk losing all your money. I leave you with a very simple formula that famous trader/blogger Nial Fuller came up with.
The Best Trades=Trend +Confluent level+ Price action Signal.
Til next time take care.
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