Understanding Forex Trends

Trend is the easiest and the most difficult thing tofinished and a reversal of the trend is underway.
understand. The difficulty arises because of theChannels are a good visual representation of the
time factor. Whenever we talk of trend it has tostruggle between buyers and sellers. It is
be related to the context of time.important to realize that you must know the time
An intraday (relates to action on that particularframe you intend to trade.
day only) price chart may show a significantThe channel on a 4-hour chart may be different
trend, which is contrary to a trend recognizablefrom that on another time period. Once you are
on a daily price chart, which may be contrary to acommitted to a particular time frame we can
trend on a weekly chart.then define trend and emphasize the importance
Success depends on recognizing and trading theof drawing correct trend lines within the context
appropriate trend. Successful investing depends onof the time frame. Now we will combine these
recognizing the short, medium or long-term trendinsights to maximize the efficiency of trading. This
and their correction (Rallies and Dips) inside thewe will do by establishing channels in the particular
larger trend.trend we are working with.
We will usually be trading when at least the shortWe learned that the trend line acts as underlying
term and intermediate term trends are in thesupport to up trend lines and overhead resistance
same direction. The ideal will be when all threeto down trends. We also can observe that prices
trends are in unison, but this is not a prerequisite,once finding support or resistance will move ahead
as intermediate trends can be substantial in bothand away from the trend line then return to the
time and price.trend line. Over time we can recognize that this
It would be too exclusive a trading strategy tomovement of price to and from the trend line
ignore these opportunities and only trade when allforms a channel, which once identified can be
three trends are in harmony.traded.
A simple definition of trend is basically the generalIn an up trend, as prices come back to the trend
direction of price movements. An up trend isline, new increased buying comes into the market
present when prices make a series of higher highsand overwhelms the sellers. These buyers are
and higher lows.made up of previous buyers in the market adding
A downtrend is present when prices make ato their positions, intending buyers who missed
series of lower highs and lower lows. When pricesearlier opportunities and are now buying the dip.
move without such a discernible series, prices areThe buying that stops the selling at the trend line
said to be trading side ways in a range orimpresses some of the previously uncommitted.
trendless.Now convinced that the buyers have the upper
Once a trend is discernible then trend lines can behand, buy. This new buying takes prices up and
drawn to define the lower limits of an up trend oraway from the trend line and the further it
the upper limits of a downtrend. It is essential thatmoves up the more impressed the uncommitted
trend lines be drawn correctly. It is the recognitionbecome and more buyers come into the market.
of the trend line and the violation of this trend lineThe previous short sellers become frustrated and
that is your key to successful trading and fortunebuy to cover their short positions and prices
building.move up further. After a while, buying becomes
As you can see from the diagram below, theexhausted and is overwhelmed by selling and
trend is moving up. To draw a trend line, draw aprofit taking.
straight line from the lowest low of the period toAs buying is overwhelmed more profit taking
the next lowest low. Make sure the line does notoccurs and nervous recent buyers will have their
pass through any bars.close trailing stops (To be discussed later)
To draw a trend line, draw a straight line fromtriggered as market orders and so price retreats
the highest high of the period to the next highestto the trend line again.
high. Make sure the line does not pass throughThis starts the whole cycle off again if the up
any barstrend is to continue. This to and fro, buying and
During development of a trend the growth of theselling in the direction of the trend plots out a
trend proceeds at different rates at differentrecognizable channel of dynamic flux of the trend.
times.Recognizing the trend line and the opposing parallel
A frequent sequence is the following - a shortchannel line - channel return line - and
initial explosive breakout and advance from aunderstanding the human dynamics that account
previous prolonged period of range trading, afor its structure, increase the efficiency of profit
much longer period of steady progression at amaking by initiating or adding to one's position at
lower rate of change and, finally, a shorter periodtrend lines and profit taking at the channel return
of noticeably slower rate of progression.line.
Each phase of trend advancement is followed byOne can, but I do not usually, trade the
a period of retracement and consolidation. Theretracement. For those who do not wish to trade
initial growth phase is too rapid to be sustainedthe trend so aggressively one can use the trend
and the ensuing correction is often quite deep.line for placing and moving stops and to initiate
The second phase of advancement is one ofnew trades. Also when a channel is in force we
steady sustainable growth and often persists forcan respond to trend violation by having a
some time. Inevitably this too ends and a periodrecognizable entry level to trade the new trend.
of retracement follows but usually not as deep asAlso, as the trend progresses one can recognize
the initial correction.support and resistance levels, which can also be
This second correction often takes more timeused for further trading on the placement of
than the first to complete the corrective process.stops.
When the correction is complete the final phaseAs you can clearly see from the diagram, the
of trend advancement occurs usually at thetrend line can change slope as the trend may
slowest rate of change for the whole progressionmove at different rates and it is mandatory to
of the trend and then this too corrects.adjust the trend as necessary.
The three trend lines that can be drawn from theSo it is with channels, as these too must be
initial point of the trend through each of theadjusted as the trend accelerates or decelerates.
retracement extremes are known as Fan Lines.Also it can often be recognized that channels can
They illustrate the decaying rate of progress ofexist within channels. These channels within
the trend. When finally prices violate the third fanchannels are plotting the short, medium and
line it invariably means the trend so monitored haslong-term trend.