What Is Trend in Forex?

This short article is trying to describe what is a trend and classify it in some categories. Learning about trend can be very helpful for your future technical analysis, whatever the method is.

This short article will try to describe what 'trend' is, classify it into some categories, and explain to you how to identify it. In general, the trend is the price movement in a market. But in order to be able to do technical analysis, we need more explanation about it.

Definition of Trend

For a beginner, sometimes the trend is a confusing thing. You may often read or listen to complaints related to their confusion in recognizing trends.

How come, when I buy, it falls down; when I sell, it rises instead. Then, after those sentences, the continuing words contain various kinds of piques.

What you have to remember is that price movement isn't in the form of a straight line in one direction. The market moves in a zigzag pattern and forms a series of successive waves, with clear peaks/tops and throughs.

The direction of the peak and troughs later will determine a market trend that is going on, whether these peaks and troughs move up, down, or sideways. These movements later will tell us about the market trend.

An uptrend is defined as a set of sequences of ascending peaks and troughs, as could be seen here:

While a downtrend is the opposite of an uptrend. It is a set of descending peaks and troughs, as follows:

Apart from uptrend and downtrend, there are also peaks and troughs which tend to be sideways/ranging.

Identifying Trend

Now, the pictures above are the trend as seen on long-term charts. The trend is not so easily recognized in the short term. So, how could we analyze the trend?

Well, because I'm a technicalist, I depend on indicators to identify the ongoing trend.

For traders who depend on fundamental analysis, they usually observe news related to the currency they trade, then make a conclusion on how the market will react.

There are various tools that could help you, but my favorites are two indicators provided in all trading platforms: trend line and moving average. These two indicators are very simple but able to describe the trend quite well.

The drawing trend line is up to your taste. I often draw a trend line from high to high, from low to low in each wave. There are trader friends who like to play with channels, so they draw from high to low, from low to high.

Whichever you choose, the important thing is that the result of the trend line you drew is informative for you. In TradingView, you can utilize the trend line indicator to automatically display trend lines on the screen.

Moving Average shows an average of the moving prices from time to time in accordance with the period you choose. So, how many periods of moving average we should use? It is up to you. It is indeed can be chosen according to your interest.

To identify trends in the daily chart, I use Moving Average 50, 100, and 200. For those who like scalping, they will adjust the time frame and the period of moving average respectively.

Trend-following Strategy

Trend-following is a popular trading strategy. It involves identifying and capitalizing on the directional movements or trends in prices.

The basic principle behind trend following is that once a trend is established, it is likely to continue rather than reverse abruptly. When following a trend in forex trading, several things are essential:

1. Price Analysis
   Monitor and analyze price movements to identify the presence and direction of a trend. This involves studying charts, candlestick patterns, and technical indicators to confirm the trend's strength and potential reversals.
   
   
2. Trend Identification
   Determine the type of trend—whether it's an uptrend, a downtrend, or a sideways trend. This helps in aligning your trading strategy accordingly.
   
   
3. Entry and Exit Points
   Identify optimal entry points to initiate trades in the direction of the trend. This may involve waiting for price retracements or breakouts to ensure favorable risk-to-reward ratios. Additionally, establish clear exit points, such as profit targets or trailing stops, to secure gains and manage risk.
   
   
4. Risk Management
   Implement proper risk management techniques, such as setting appropriate stop-loss orders, to protect against potential losses. 
   
   
5. Fundamental Analysis
   Consider relevant fundamental factors that may impact the trend, such as economic indicators, geopolitical events, or monetary policy decisions. These factors can contribute to trend reversals or reinforce the existing trend.
   
   
6. Confirmation Indicators
   Utilize additional technical indicators or oscillators to confirm the strength of the trend. These indicators, such as moving averages, MACD (Moving Average Convergence Divergence), or RSI (Relative Strength Index), can provide further insight and support decision-making.

Successful Traders Who Use Trend-following Strategy

There have been several popular traders who have employed trend-following strategies in their trading approach.

Here are some notable figures in the world of trend following you should know:

1. Richard Dennis
   Renowned as a commodities trader, Richard Dennis conducted the famous "Turtle Trading System" experiment where he trained a group of individuals with no prior trading experience using a trend-following approach.
   
   
2. Ed Seykota
   Seykota is an influential trader and well-known as the "father" of computerized trading systems. He has successfully implemented trend-following approaches in his trading.
   
   
3. Michael Covel
   A well-known author and speaker who has promoted the concept of trend following through his books such as "Trend Following" and "The Complete TurtleTrader".
   
   
4. John W. Henry
   A successful entrepreneur and former professional baseball player who transitioned into trading. He is known for applying trend-following approaches in his investments and establishing a fund management company focused on this strategy.
   
   
5. Jesse Livermore
   Although not exclusively a trend follower, Livermore was a legendary trader who used trend analysis to make successful trading decisions. His works, such as the book "Reminiscences of a Stock Operator," depict his approach and trading principles involving observing market trends.
   
   
6. David Harding
   An entrepreneur and founder of Winton Capital Management, an asset management company that employs trend-following strategies in the financial markets.

The forex market is made up of many kinds of trends. Your success in trading depends on your ability to read the direction where the trend is going.

There are still many more tools to identify trends, but hopefully, this explanation can help your understanding of the forex market.