How FX Traders Identify the Trend

Find It and Ride It

Momentum
Momentum. By Nevit Dilmen (Own Photograph) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia Commons

"Don't give me timing, give me time."

-Reminiscences of a Stock Operator by Edwin Lefevre

Learning how to identify the trend is critical but what may surprise you is that trend identification is by and far the easiest skill for traders to develop. What becomes much harder is what was stated in the opening post where traders must not beat themselves before entering the market. Today's article will show you simple indicators to make sure you're giving yourself a fighting chance by only looking for trading opportunities in the direction of the trend.

 

Trend Definition

A trend is a technical or chart phenomenon where a market, any market, moves in one direction with little attention paid to the opposite direction. The opening quote from the famous 90-year-old book, Reminiscences of a Stock Operator states a critical point. Time is more valuable than timing when involved in trend trading.  If you look at a healthy trend, many entries may have seemed unfavorable at the time that worked out in the end.  Anyone who entered as the trend began, even at what may have appeared to be a late entry at the time is better off than someone who was able to sell in the direction in the direction of the trend a few thousand pips lower. 

Why FX Trends are the Most Important Trends in the Financial World

As of March 2015, the clearest trend in global markets is either EURUSD, West Texas Intermediate Crude Oil or WTI, or global equities like German Dax Index.

 An enormous benefit of understanding FX trends, even if you're new to FX trading or aren't sure about trading this market is that FX trends to cause another trend or trends.  One thing that only a small percentage of global market participants understand is that WTI and the German stock market, the DAX are moving the direction they are because of the direction of EURUSD.

Crude Oil is priced in USD, so the strength of the USD has accelerated the losses, the opposite event occurred in summer of 2008.  On the different end of the spectrum, the German DAX has benefited wonderfully from the weak EUR rising an incredible 23% YTD, and it's only March! 

Trend Trading Indicators

An often stated complaint is that most indicators are lagging. First off, of course, they are as they're calculated from historical prices and any thought on what will happen tomorrow, next week, next month or more is just a guess. Secondly, a lagging indicator is a good thing in the world of trend trading. A lagging indicator will prevent you from overreacting, which is one way that traders beat themselves with little effort from the market. 

Popular indicators that traders often use to identify the trend from most to least popular are: 

Moving Averages: Average price of 'n' candles which moves in the direction of the trend. A flat moving average indicates a trendless market. 

Trendlines: No calculation required. A trendline is drawn off extremes in the direction of the trend so, in an uptrend, a line is drawn off higher lows and price staying above the line confirms the trend is still in play.

 

RSI: An oscillator that's build on the closing strength over 'n' days, usually 14. Because strong uptrends often see closes near the high, the higher value indicates a strong market. 

Pivot Points: A calculated price on the chart based on prior high, low, and close. If a pivot continues to move higher then the trend is clearly higher and vice versa in a lower market. 

Ichimoku: An advanced trend following indicator that helps you to see mid-points over various times. Price and similar average lines above the cloud help to show a strong trend that should not be fought. 

Elliott Wave: My favorite rule-based approach to viewing markets and no indicators are required. Elliott Wave presumes that all trends move in a set of distinct and identifiable patterns. 

More detail can be found in the article: 

How Forex Traders Can Identify A Favorable Market To Trade

Happy Trading!