Many new traders make the mistake of always looking for the “reversal”. A currency pairing may be going in one direction, but they look for signs that it will turn around. It’s tempting to do this, because it requires a lot more individual smarts than simply following a trend.
But the truth is, traders who identify and follow Forex daily trends are much more likely to make good trades. This is because they’re going on confirmed evidence, rather than speculation.
Still, it’s not always easy to identify the direction of Forex trends.
1. The line graph
Not all Forex analysis needs to be complicated. The line graph does the simplest job of all, and is therefore one of the best ways to identify a Forex trend. Quite simply, it shows you the direction the pairing has been going in.
When using a line graph, look at what has happened over the last few weeks and months. You’ll usually get a pretty clear picture of the current trend. If you don’t, and the pairing is extremely volatile, only then should you not trust the current direction of the trend.
2. Highs and lows
Checking the highs and lows over the last weeks and months is an excellent way of identifying the direction of the trend. During an uptrend, the highs will be higher, and so will the lows. During a downtrend, the highs will be lower, and so will the lows.
To get a clear picture, you will have to acquaint yourself with the data on the currency pairing over a good few months. This is so that you know what constitutes a higher high, or a lower low.
3. Use moving averages
A moving average (MA) is an incredibly popular Forex indicator. It is calculated by averaging a number of past data points. The result is plotted on a graph, which you can then look at to get a broader perspective on the pairing, rather than day to day fluctuations.
This gives you a very simple but useful indication of the direction of current and past trends. Instead of having to look at the minutiae of the data of the past few weeks, looking at the average puts all that information in context.
Good brokers provide good tools
The above 3 indicators are excellent ways to determine the direction of the trend. You don’t have to do the calculations yourself, as all good brokers will provide graphs and other tools which collate the information for you.
Going against the trends is risky, but it can seem more exciting than simply “going with the flow”. However, if you’re into trading Forex to make money (and let’s be honest, that’s why most of us do it), following trends is the most effective strategy.
