The first important lesson every beginner is taught about forex trading is to obey the market trend. Hence we hear this saying frequently from experts; “the trend is your friend” and you must never go against it. This work will therefore help you learn these common principles and indicators used in spotting a change in trend while trading with the best forex brokers today.
Meaning of trend
The word trend in trading is used to describe the dominant direction of the market over time. The idea of identifying the market trend stems from the fact that the market is known to operate in seasons. Hence, we have a period when more people are eager to buy more causing prices to keep going up and a time when people are no longer willing to buy with many selling off their holdings. The mechanism used to identify these different periods is known today as market trend.
Basic trends you need to know
There are two major trends in the market today discussed below:
Upward Trend: The upward trend is the period when there is high demand in the market. When more people are eager to buy causing the price to keep rising over time. Prices are seen creating new highs.
Downward Trend: The downward trend is the period when buyers lose interest in buying and old investors begin to sell off their holdings massively. In this case, the prices keep falling creating new lows.
How to spot a change trend
There are two important methods used by traders today in spotting a change in market trend. We have discussed them below.
A. Price Actions
Observing the price action is the most popular method for spotting a change in the market trend. Here, traders tend to observe the different price levels bridged by the market over time. For instance, when the prices consistently create new higher tops with higher bottoms, we can spot an upward trend at this point. On the contrary, when the prices consistently form new lower tops with lower bottoms we spot a downward trend.
B. Indicators
Another important method used by traders today in spotting a change in market trend is the use of indicators. The movement pattern of these indicators at some points often hinted at a change in market trend. We have discussed some of these indicators below.
- Moving Average (MA): The predominant direction of the MA is a widely used method for spotting the market trend. When the MA moves continuously in an upward trend we assume the market is in an upward trend and vice-versa.
- Relative Strength Index (RSI): The different ranges reached by the RSI is another way of spotting the market trend. When the RSI stays above 30 and reaches 60-70 very often, we spot an upward trend. The opposite is the case when it falls below 30 and stays below 50 often.
- Bollinger Band Indicator: When the prices fall into the lower bands of the Bollinger we spot a downward trend, and when it rises to the higher bands we spot an upward trend.
- Average Directional Index (ADX): The direction of the ADX is an important means of spotting the prevalent market trend. For instance, when the ADX is rising, we can spot an upward trend. We spot a downward trend when the ADX is falling.
- On Balance Volume Indicator: The OBV is an important volume indicator that could be used to spot the market trend. For instance, when the OBV is rising we say buyers are accumulating which is a means of spotting an upward trend and vice-versa.
