Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to be talking about trends, you have heard me mention them in other videos and touch on what they basically are but we will analyse them today in a bit more depth.
I believe everyone getting into forex has heard trading expression “the trend is your friend.” The reason why that phrase is so popular is because quite frankly it’s true and trend identification and analysis is key to a well rounded trading plan.
Forex trendlines can be quickly identified and are used in almost all charting analysis due to its usefulness and simplicity. Lets now discuss what trendlines are, how we can accurately draw them and how to apply them when trading.
THE TREND IS YOUR FRIEND!
As we already know there isn’t any single stand alone trading strategies that will give us a one hundred percent win ratio. However what we generally want to do as traders is improve our chances of making winning trades and identifying high probability trade set ups. One of the most comprehensive is trend trading.
Trend trading is a simple way to exemplify your existing strategy and reduce strategy imperfections by identifying the strongest trends in the market.
When our entries are not necessarily the best or when temporary shifts in the market occur due to factors such as news releases our losing trades can always come good when trading the direction of the markets trend.
As we can see here we have a strong bearish or downward trend. The market retraces here more than we may have expected however depending where our stop loss was placed this potential losing trade was able to continue on to become a profitable trade as we were on the side of probability.
If we measure the amount of downward movements vs the amount of upwards movements in any given bearish trend, the direction of the trend always prevails at yielding more pips in movement. The same would be true if the trend were reversed.
HOW TO DETERMINE THE TREND
Determining trend is seemingly obvious as we move to the larger time scales. When you look at a wider view of any given chart just ask yourself the question of which direction are prices generally moving in? As we can see here that direction is up!
If the trend is moving upward or bullish, then confirm the direction of the market by identifying a series of higher highs and higher lows in accordance with price action on the chart. A valid up trend will almost always Have these.
Here we can see each successive high is higher than the previous high as well as each new low is higher than the previous low. Now all good things do come to an end so eventually this trend will be broken.
A good indication of the trend being broken and possibly reversing is when the uptrend starts presenting a series of lower lows and lower highs. This will usually occur along lines of prominent support or resistance. Identifying when a trend has come to an end is necessary in order to know when to exit your trades in this instance if you are long or even trade the reversal after identifying said reversal.
This example of a trend reversal shows us how once a lower low was established the trend continued on in the opposite direction. If we were trading the reversal we could seek to join the new trend when the market retraces to the next lower high.
When we look to identify lows and highs it is perfectly acceptable to point out the most obvious ones. it is advisory to do it on the daily or four hourly charts so that you may view the bigger picture and identify obvious direction, if the direction is not obvious or your trend is approaching prominent support or resistance move on to another pair and check back in once thing become more clear.
Using our line tool we are now going to draw in a guide along this trend line. It is often easiest to identify a trend by doing this.
Trend lines make it clear for us to identify areas where the market is likely to bounce off our drawn support and resistance. We could couple this perhaps with another technical indicator such as the Fibonacci retracement tool to identify a potential bounce using two converging indicators, here we would have a anticipated a bounce along this line after this higher high and our Fibonacci level and the trend line met up to offer us a potential high probability entry.
The chart now shows us levels that price has respected in the past while moving upwards in the direction of the trend. We can now look for long entries in this instance into the market until eventually the uptrend comes to an end.
Now please take some time to think about the ideas we have discussed today, how they apply to the forex markets and how you may apply them in future, please sit back and contemplate what you have learned today and remember Contemplation is the key to learning.