Trend identification strategies form the backbone of successful forex trading. Getting on the right side of a long and stretching trend can reap dividends that could be as generous as hundreds of pips or more. Little surprise then that the best forex traders understand trend behaviour intrinsically. Today, we look at the warnings signs that the markets give us when a trend is about to end.
The Warning Signs That A Forex Trend Is Ending
Nothing Lasts Forever. When forex trading, always keep in mind that all trends at some time must end and reverse. Even the strongest trends that you may be riding will sooner or later dissipate – market activity simply never goes up in a straight line. Bulls and bears get exhausted – and when they do, you better get ready to take your profit and run.
Watch The Price Candlesticks Closely. Price candlestick formations within forex trading will often be one of the earliest market signals that warn of impending doom for a prevailing trend. There are many different forex candlestick patterns to study – several will be warnings on trend reversal. For instance, engulfing patterns may happen at the end of a trend just as the direction of the trend is about to switch. A candle that is in the direction of the prevailing trend is entirely engulfed by a candle that is going in the direction of the new trend. Doji patterns will also often form as a trend stutters and sputters at its peak – while the trend may not have reversed as such, it shows uncertainty and indecisiveness between buyers and sellers. No one has the upper hand. Studying candlesticks is an important part of being able to spot trend reversals.
Distinguish Between A Trend Reversal & Consolidation. Just because a trend seemingly comes to a halt does not mean the overall trend is over. In any downtrend or uptrend, there will always be periods of retracement when price moves against the direction of the overall trend. These forex retracements are often short lived – the prevailing buyers/sellers are simply taking a breather before the next big push. When that push arrives, the overall trend will be resumed. A good way of seeing if a trend is in tact, despite price movement going against it, is to look at what the moving average is doing. Often, trends become so energetic that price action zooms far away from the moving average line. This huge distance between the price and moving average can never be sustained – price ALWAYS reverts to the moving average at some point. Sometimes, during a retracement, the price will then move back towards the moving average – but still stay above it (for an uptrend). It may even kiss the moving average before continuing on its bull run. So long as the moving average curve is upwards, and price is still above the moving average – the uptrend is intact. The reverse clearly applies for a downtrend.
Indicators & Chart Patterns. Finally, a mix of the right forex trend indicators (such as the moving averages talked about above) combined with chart patterns you observe through your analysis can be further ways to spot trend failure as and when it happens.
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