Fewer skills in the FX trading universe are more keenly sought after than being able to spot a trend. When an FX trader is able to pick a trend early, and ride it for the majority of its life, he can pick up pips that can be in the range of hundreds and even more. The FX markets when trending are at their most outrageously profitable.
With this article we seek out ways to improve your ability to pick out and engage in trading the trend.
Tips To Pick FX Trends With More Accuracy
The best way to determine a prevailing trend is to follow the checklist below:
1. Have The Markets Experienced A Range Shift? A dead giveaway of a forming trend is the demolition of previously held support or resistance strongholds of price. New trends just bulldozer past old support or resistance levels. When analysing your FX charts seek out price breakthroughs. The candlesticks should not only pierce the support/resistance line in question but finish beyond them and form a new price base upon which to leap from. Often, following a support or resistance breakthrough, the price may well return to test the support or resistance area that was broken. This is perfectly natural and is part and parcel of the breakthrough process. When a range shift has occurred, old support often becomes resistance (or resistance becomes support depending on the direction of the new trend).
2. Have Key Trendlines Been Violated? Just as support and resistance shifts can indicate a trend change – so can the breach of a key trendline. A strong trendline will have multiple touches on it, and for this to break can be a significant sign that price may be taking on a new agenda in direction. Here’s a tip when looking out for trendline breakthroughs – trendline breaks on the RSI often lead breaks in actual price, so watch that little indicator like a hawk when you’re trendline spotting.
3. How Is The Moving Average Looking? Moving averages can be a great help in providing clarity with trend direction. Even more succinctly, plotting two moving averages together (a fast and slow simultaneously) can provide FX traders with key trend change signals. We would of course look to see the slow moving average cross the fast to verify a trend change. When you see moving averages behaving rather skittishly – for example price and moving average quite close to one another, with the angle of the moving average flat – this can be a sign that there is no real trend to speak of. Acting upon moving average signals in this environment can be risky, as markets are most likely consolidating.
4. Get Out The Trend Spotters. The right indicators can really help an FX trader understand existing trend mechanics. We discussed the moving average at length above, but there are so many more trend indicators to tap into. For instance, the Average Directional Index (ADX) is a splendid way of determining both trend direction and strength. The MACD (Moving Average Convergence Divergence) is a classic trend indicator telling us the relationship between fast and slow moving averages. This relationship can reveal key insight into new trend formations just as they are upon the cusp of forming.
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