A market trend is a direction in which a sector of the market moves over a period of time. Those who study finances speak of three types of trends — secular, primary and secondary — depending on the length of the time frames under consideration.
As with all market sectors, the most effective strategy is to “trade with the trend.” The trend is only your friend so long as it lasts. Longer time frames tend to dominate the shorter ones in analyses of long-term investments, but shorter time frames do tend to gain in importance when it comes to determining the day-to-day performance of an asset. You can use forex charts such as these to perform your studies.
Using Moving Averages
Simple- and exponential moving averages are two very valuable tools that you can use to determine trends in the forex market. To calculate the simple, or arithmetical, moving average, you divide the sum of the closing prices of a security for several time periods by the number of those periods. The exponential, or exponentially weighted, moving average is similar but gives more weight to the most recent data available. It is calculated recursively in a rather complex formula, which you can find by clicking here.
The two types of averages are useful for different purposes: The EMA reacts more quickly to recent changes, and the most popular short-term averages — 12- and 26- day EMAs — are used to create the moving average convergence divergence (MACD — used to spot changes in the strength, direction, duration and momentum of trends in the prices of a stock) and the percentage price oscillator (PPO — a measurement of the difference between two moving averages, given as a percentage of the larger one). The EMAs that are most widely used to indicate long-term trends are the 50- and 200-day ones.
Now that we have covered the two types of average, let us look more closely at how to use them together to figure out the direction in which the forex market is moving. This form of tracking is, of course, best done on a chart.
If both averages show a tendency to simultaneously hit the bottom of the chart — a phenomenon known as a “double bottom” — then you can usually be sure of support in that area. You can also gage which direction the trend is moving by setting up a long-term SEA and a short-term EMA. Counting the number of “waves” or the “pivots” that each wave displays, you can make an educated guess as to whether a trade you intend to make will be with or against the trend. There are several theories regarding this point, but one — known as the “Elliot wave theory” — states that an impulse wave will consist of five swings while a corrective wave will consist of three. (The terms “impulse wave” and “corrective wave” both refer to the ways in the market moves, but they are used when the waves are in the direction of and contrary to the trend respectively.)
When you set the pivot count against the moving average diagnosis and subsequently make a “candle analysis pattern,” you can get a good idea of your chances of making a successful trade.
“Trend” in the forex market is retrospective.
Other experts may not agree with this, but there are those who think that the word “trend” is overused when talking about the forex market. According to them, you can only speak of “trend” here in a retrospective sense, that is, after it is too late to make the trend. What distinguishes a good forex trader from a bad one is that the former knows when to enter the market and get things right more often than not.
The sooner you get into the trade before the end of the trend occurs, the lower your risk of losing money and the higher your reward will be. The secret here is to base your strategy on high probability time cycles — these will tell you when it is and is not a good idea to trade.