Hello and welcome to another edition of the bulls and the bears. Today I am going to show you a few tips on how to catch the trend on the forex charts. As I indicated in one of my earlier articles,What the Heck is Price Action Trading? no magic indicator, fancy robot,or any snazzy software can help you identify the trend. The forex market pretty much has a mind of its own. It can turn on you the same way when lightning strikes. So the best thing you can do is to look out for the most obvious direction the market ie to take.
Now some of you are probably going like”How can I tell which direction the market is going?” Well you employ a concept aptly called TLS. Basically you employ a sweet cocktail of trend analysis. Let’s be clear: Weare not going to learn how to trade a trend here(You can catch that on Trading Trends With Price Action Analysis).We are merely going to figure out how to catch the most obvious direction the forex is taking.. We will start with the less complicated techniques and then work our way to the advanced ones.
Your Price Chart Should Be Free of Indicators
If you want to catch a trend without pulling your hair out, just observe a price chart free of indicators.You need to understand that trend identification is not rocket science. You only need to keep it as simple and sweet possible. One way of doing that is watching a naked price chart free of those scary-looking tools called indicators. Probably the most important trend to keep your eye on is the daily chart trend. And by the way,you will be employing both short-term and long term analysis.
There is one important question you need to ask yourself when doing this analysis, And it is “What is the chart looking like between the last three months and two years? This is important because this give you a clear idea of where the chart is headed. And you make sense of this pattern in terms of its movement from left to right on the chart. Now if that doesn’t pan out, just pull up a daily or weekly chart and ask yourself a very important question: Is this chart falling or rising? No need to sweat the technique on this one.
Let look at the price action of EUR/GBP pair
It’s pretty obvious that the overall trend is on heading upwards. However, take a close look at the countertrend retraces or pullbacks within the uptrend. Check out How to Trade 50% Retracement Strategy with Price Action Analysis
Look For Swing Highs and Lows
Look for the most obvious swing highs and lows. One thing about trends on the markets, is that they leave swing highs and swing lows in their trail. Ever seen jet stream coming out of the exhaust of an airliner? That’s what it looks like when trends leave behind swing highs and lows.
The swing highs and lows give you a clear idea which direction the market is trending. Let’s take a look at a swinging illustration using the GBP/USD pair.
As you can see the purple dots represent the highs and the lows in the uptrend. You can see the swing lows form a staircase as the trend rises. However, if it were a downtrend, you’d be focusing on the highs instead. In this case the Highs will be creating a staircase in the opposite direction – the downside.
Map Out Your Higher Highs and Higher Lows, and Lower Highs Lower Lows
Now that you have marked the swing points on your chart, you can now ascertain whether the market is HH(Higher High) HL,(Higher Low ) LH(Lower High ) and LL((Lower Low ). You should be able to spot the obvious pattern of HH and HL for the uptrend and LH and LL for the downtrend. Let’s take a look at NZ/ USD pair.
Voila! You see all the Highs and lows nicely layed out in the price action. Even better the uptrend is already in place. So you shouldnt have any problem identifying the highs and the lows. If you want to learn some more about highs and lows,look up Do A Little Swing Trading and Trade Trends With Price Action Analysis.
Do You See Price Action Signals Forming?
You need to check whether there are price action signals forming on the chart. That should tell you which direction the chart is going.If you keep getting persistent signal failures that should tell you that the market is changing direction. Let’s take a look at such an illustration using the USD CHF pair.
Now this image shows a double bottom pattern as indicated by the blue lines. Jus so you know the double bottom pattern is a bullish reversal pattern which takes shape once the bears run out of steam. The neck line, labelled in pink represents the price confirmation signal. The green circle represents price breaking the neck, which confirms the beginning of the bullish trend.
However, the price action does an unexpected 360, initiating a strong bearish move. This represents the price signal failure that I mentioned earlier. The bears are basically saying”Not so fast we’re taking over.” The moral of the story is that the failure of this signal should clue you in as to a trend reversal about to take place.
For more information on how to separate good price signals from bad price signals, look up Price Confirmation Signals:Weeding The Chaff From The Good. And if you want to know about the double bottom pattern and other chart patterns, Look up Trading Forex Chart Patterns Part II. You’d be better served looking up Part I also.
Look Out For Change in Trend Direction
Probably the most important factor you want to concentrate on is a change in the market trend direction. You want to pay particular attention to the swing highs, but first start with the swing lows. Why? Because, not only will you catch the overall trend, but through the price action, you should be able to tell whether the trend is holding or not.
Let’s say you have a series of Higher Highs and Higher Lows in an Uptrend. When you see price break down past the previous swing low, it;s the strongest signal that the bulls are running out of breath. I’m sure you know that the downtrend is made up of Lower Highs and Lower Lows. Conversely when price breaks above the previous low, it should tell you that the bears are running out of breath. In other words, the downtrend is coming to an end. Let’s take a look at a typical change in trend using the EUR/USD pair.
This is a typical example of a changes in trend direction on the chart. As you can see on the chart, the uptrend starts strong, and then runs out of steam, due to price breaking down at the previous swing low. It’s the same situation with the downtrend.The bears start strong and then run out of steam because price breaks down at the previous swing high.
That’s a wrap for ”A Few tips On How To Catch The Trend On The Forex Charts” As you can see, it’s not that complicated. Once you master the art of identifying the trend/direction of a market then you look for a signal or key level to make your entry.Just remember that the market does have a mind of its own, so you will be better served to ride with it.
Till then take care.
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