“Trend is my friends and I never go against it.” This is the number 1 rule of every trend-following forex trading system and also the famous advice that forex trainers give to beginner traders. Although I could not agree more with this statement as spotting the trend and riding it is in the heart of this business, it amazes me how very few quality materials on trends circulates the web.
The very first thing that shall come up while performing technical analysis is that the prevailing trend should be identified. A trend is the direction where prices have been going until now and possibly will continue to go in the future. There can be three kind of trend on the market. A trend can be bullish (uptrend), bearish (downtrend), or at some case we speak about a sideway (ranging) trend. Each of these trends has certain conditions to meet.
Conditions of an Uptrend (Bullish)
To be able to decide what kind of trend we are dealing with, a simple visual test on the chart shall be performed. The first condition of a bullish trend is that it has to consist of consecutive, higher significant lows or bottoms. The second condition is that it has to consist of consecutive, higher highs or highs that are forming near similar price levels.
(Click chart to magnify)
The bullish trend fails only when a new low develops under the previous significant low on the actual chart. Be aware that the development of a lower high or the break of the trendline has nothing to do with the change in the trend.
Conditions of a Downtrend (Bearish)
Not surprisingly, the first condition of a bearish trend is that it has to consist of consecutive, lower highs or tops. The second condition is that it has to consist of consecutive, lower lows or bottoms near similar price level.
(Click chart to magnify)
The bearish trend fails only when a new high develops over the previous significant high on the actual chart. Be aware that the development of a higher low or the break of the trendline has nothing to do with the change in the trend.
Conditions of a Sideways Trend (Ranging)
Of course when the market goes sideways we cannot really speak about a trend. A clear version of the sideway move is when the price of the underlying currency pair is trapped between a so called support and resistance. These are price levels where prices has previously stopped and turned around in the past and where prices may stop and turn around again in the future. Of course sideway moves can be more difficult to identify as the price fluctuation under such circumstances can be more chaotic, and in these cases we cannot speak about a channel.
With the understanding of trends and their conditions it becomes easier to follow the trend or to use a trend-following trading system like Stealth Forex Trading System™ to help you with your trades.