How To Identify Trends In The Forex Market

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One of the most simplest tools to determine the trend in the forex market is to draw a trendline. Trendlines will not only help you establish the direction of the trend plus also identify the support and resistance. So what does a trendline do? It shows you the past price action and also gives you an indication of the future direction of the market. Now, a trendline is a dynamic line of support during an uptrend and a dynamic line of resistance in a downtrend.

How do you draw trendlines? In an up trend, connect two lower highs with a line. That’s it! And in a downtrend, connect two higher lows with a straight line. Now, the slope of a trendline can tell you a lot about the strength of a trend. For example, a steep trendline shows extreme bullish attitude of the buyers.

Now, another technical indicator that is used to measure the direction and strength of the trend is the Average Directional Index (ADX). Values above 30 on the ADX means a strong trend while values below 20 indicate a trading range or no trend. The higher the ADX value above 30, stronger is the trend.

Another popular indicator that can be used to confirm the strength of a trend is the Stochastic. Stochastic is comprised of two lines %K and %D lines that are plotted on a scale of 0 to 100. Readings above 80 means strong upward movement and a reading below 20 represents a strong downward movement.

Once you have determined the strength of a trend, confirm the strength of the trend with the slope of the Stochastic. Stochastic should have a high up slope in case of a strong uptrend and a high down slope in case of a strong downtrend.

Another point that you should note is that when the price action makes a high or low, Stochastic also makes high or low. This indicates a strong trend that is most likely to continue. If this is not the case, then the trend is most likely to reverse itself. You can also use the MACD ( Moving Average Convergence Divergence) Indicator in place of a Stochastic.