Many traders agonize over interpreting charts, but finding market direction is an important skill for any trader to master. This is particularly true for forex where trends can last for extended periods of time.
Whether you are a swing, breakout, or even a range trader everyone should have at least one method for easily identifying the trend to take advantage of an extended market move. Today we will be examining just that. Let’s look at three basic ways to find trends in the forex market.
PRICE ACTION
First off, traders can always turn to price action to identify market direction. This is probably the most intuitive method to learn as the majority of traders are already using charts in their analysis. An uptrend can be classified as a market that makes a series of higher highs and higher lows. A downtrend can be classified as a market that makes a series of lower lows and lower highs.
Below we can see an excellent example of a downtrend on the sterling/dollar (GBP/USD). The pair has dropped already 1511 lower from its 2013 high. Astute traders, working from left to right on their graph, can pick up that prices have been continually declining, prompting them to look for new sell positions. This methodology can be repeated until we see price getting higher. In the event that new higher highs are formed, our opinion and trading bias would change for the pair.
Chart source: Created using FXCM’s Marketscope 2.0 charts
200 MVA
For our next method of spotting the trend, we will look to employ a 200 period simple moving average (MVA). This technical indicator is widely used across markets, and is traditionally used for levels of support and resistance. Essentially, the 200 MVA is calculated from adding the close price for the last 200 candles displayed on the graph then dividing that total by 200. Once this line is plotted on the graph, traders can then see where price is relative to the MVA.
Traders using a 200 MVA believe that if prices are trading below the indicator that the trend is down, while prices above the indicator would represent an uptrend. We can see a great example again with the GBP/USD daily chart below. Price began the 2013 trading year over the 200 period MVA. However, price quickly declined moving below the indicator. Traders watching the 200 MVA were able to change their market bias and their trading strategy accordingly.
Chart source: Created using FXCM’s Marketscope 2.0 charts
AROON INDICATOR
Lastly, we will round out our hunt for the trend with the Aroon indicator. This indicator is a favorite of traders because it is easy to read. The trend is easily derived from the interpretation of two lines, Aroon Up and Aroon Down. Aroon Down is shown in green below and as the name suggests, it tracks price in a downtrend. Aroon Up is drawn in red and conversely tracks upward strength for the pair.
Traders will track these two lines to see which one is displayed above the other as they oscillate in a range between 0-100. Below we can see Aroon Down is displayed at the top of the indicator after crossing above Aroon Up. This suggests that the indicator is signaling that the trend is in an established downtrend. If Aroon Up was to cross back over Aroon Down, this would signal to traders that there has been a shift in market direction.
Chart source: Created using FXCM’s Marketscope 2.0 charts
After reviewing the above three methods, I hope you see that finding the trend does not have to be an ongoing or difficult proposition. All three of our methods have been successful in helping us interpret the change and now continued movement of the GBP/USD’s standing downtrend. Going forward, feel free to choose a method that works for you and take advantage of the next Forex market move.
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[Editor’s note: Read another forex trading strategy story here:
Catching Reversals With Donchian Channels by Jeremy Wagner ]
