Recognizing the Trend

Getting to Know the Trend in Forex Trading

One of the most closely guarded secrets among veteran financial investors is also one of the simplest: the trend line. In its simplest terms, a trend line can tell you the likelihood of how a price will perform in the future. Now, like everything when it comes to financial investments, it is not infallible. It can simply tell you how a price will probably behave in the future. When you learn the simple art of spotting trends and drawing trend lines, you’ll be able to increase your potential for profit greatly in the Forex market. Spotting trend lines, in fact, is a tool that investors in all financial markets use. Whether it is the NASDAQ or the Japan Exchange Group, when a savvy investor can spot a strong trend line in a stock, their chances of profiting off that stock improve. Again, this is not guaranteed. But then again, when nothing is ventured, nothing is gained.

There are two types of trend lines you should look for: an uptrend and a downtrend. If a currency pair is in an uptrend, the likelihood is that the currency pair will continue to rise. This is the time to buy because the price will most likely continue to rise and when you decide to sell, your currency pair will most likely be priced much higher than what you bought it for. If your currency pair is in a downtrend, it is likely to keep dropping. At this point, you will want to sell your currency pair as soon as possible.

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Spotting a Trend: You’ve heard the expression; “Those who don’t know history is doomed to repeat it” haven’t you? Well, even if military generals and leaders of states haven’t taken this simple lesson to heart, financial investors have. They have in spades. They have even built a simple science behind it. So how does it work? Simple, really: analyzing the past performance of a stock will give an investor their best possible guess at how that stock will perform in the future. That’s not to say it is always easy to spot a trend; indeed, sometimes it is downright impossible to spot a trend, depending on its past performance.

Spotting Trends in the Forex Market: In trading Forex market currency pairs, you can spot a trend line when the price starts to move. If you can spot a consistent pattern of high peaks and deep valleys, you have a very good chance of identifying a trend. It could be an uptrend or a downtrend, but the important thing is you’ve identified one.

For all you visual learners, here are a few graphs:

As you can see, this currency pattern is on a downtrend. Though it has its moments of peaks, you can see the peaks are getting lower, just as the valleys are getting lower. If you see one of your currency pairs behaving this, it is suggested that you sell and cut your losses. The trend indicates that the price will only fall further. Of course, since nothing is guaranteed in the business of financial investment, it is very possible the currency pair price will make a rebound and embark on a serious uptrend, which would basically look like the reverse of the chart of the downtrend.

This example is extremely simple and like what was said before, at times the movements of a currency pair’s price ranges so much between the extremes that no trend can be found. This is what is called a Range, as in a Mountain Range. Let’s take a look at one:

As you can see, the price of the currency pair is a bit all over the place. If you plan on investing on this type of situation, you have to keep a close eye on its movements and be ready to sell or buy at a moment’s notice. You can see the first half of the range is in a definite downtrend, yet the second half of the range suggests it could very well be on the verge of breaking out into an uptrend. It’s a messy business, investing in trading ranges. It’s unpredictable, the risk of loss is greater, and there’s no possibility of even guessing how it will behave in the future.

When you spot a currency pair trading along a trend line, however, your chances of profiting are much greater. So stay away from the ranges; just walk away. Hold out until you can identify a trend and then trade along with the trend’s direction; meaning if the trend seems to be an uptrend, trade your currency pairs as if it will continue to rise. To trade against a trend is very risky and even a seasoned trader needs to be extremely cautious if they take this line.

The entire basis of the trend line science is based on the assumption that a stock’s history will continue on its present path. It’s really just a guess. In this way, it is no science at all. After all, investing is basically gambling and nothing is 100% in gambling. In many ways, Forex market investors have to rely on their gut instinct. There are a few accepted suggestions that investors treat as truth, however.

A Little Trend Science: As mentioned above, you should always trade with the trend of a currency pair. That’s trend science lesson #1. Trend science lesson #2 is that, when a trend is identified, it is expected that the price of that currency pair will continue in that same fashion into the future, whether up or down. Trend science lesson #3 is that there are three time-frames Forex market investors use when predicting a price’s future: short, intermediate, and long-term. Each one of these peaks into the future is different. You can look at a currency pair’s trend in the long-term – over the past year or so – and this trend will be world’s away from the trend you will see in a short-term – meaning over the last 24 hours – and that too will be different than the intermediate trend line.

I think you can see that there is no science at all to investing at all, it’s just using the past to attempt to predict the future. Unfortunately, there are no soothsayers in the world of Forex market investing.

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