To a trader, correctly identifying trends in the market would be considered the ultimate edge in trading since following trends represents one of the most profitable trading opportunities provided by the Forex market.
Accordingly, identifying and trading along with the direction of the trend until it reverses and a new trend ensues is a prime objective for many forex traders.
Some of the more common tools they might use to identify the direction of the overall trend in a currency pair are briefly discussed in the following sections.
Trend lines are often drawn between successive extremes in the market price to help identify the trend.
They can be divided into three types: bull, for rising prices; bear, for declining prices; and flat, for sideways markets.
Classic Uptrend and Downtrend
An uptrend generally consists of a directional price movement where each subsequent high and low is higher than the previous high and low. Conversely, a downtrend would be the reverse, with lower lows and lower highs.
A flat trend or sideways market would be represented by a series of highs occurring at an upper level along with a series of lows at a lower level, thereby indicating little overall directional movement.
You can determine the overall trend on a chart by simply looking at it and considering whether the general direction of the currency pair’s exchange rate appears to be rising, falling or going sideways.
A trend channel is a classic pattern that appears on price charts, and which consists of the boundaries created by price fluctuations.
Trend channels can be created by drawing a line along the lows of the price action and another parallel line along the highs.
This will highlight a channel pattern which many short term traders use to trade against by selling as the market nears the upper line and buying as it approaches the lower line.