Spotting Trends in the Forex Market

Finding profit in the Forex marketĀ is not always easy for the small trader and the definition of a small trader, is anyone trading less than $50,000 per trade. Many people find it hard to classify themselves as small traders, but a large percentage of the market is made up of speculators trying to find a quick payday, or day traders trying to scratch out a living by bringing home 50 to 150 pips per day. Unless these traders have developed a smooth style and perfected their system most will leave currency trading with less money than when they started. However, the simplest way most traders can increase their odds of placing successful trades is to learn to mark trends and then understand that the trend is their friend.

Trends can be identified in any trading time frame that you choose. However, as you begin to notice a developing trend in a specific time frame, you should be aware of how the market is trending in more expanded time frames. For example, you choose to follow and trade the EUR/USD in the 15 minute time frame because it a number of trading opportunities each day and you want to capitalize on them. Currently the trend for the 15 minute time frame is down and you can draw a trend line extending 12 hours back that confirms this. You then change the time frame on your chart to 60 minutes and it confirms this trend line, you can then look for selling opportunities. However, if the 60 minute trend is flat or the line is flattening the market may be getting ready to either consolidate or reverse.

Trend lines are nothing more than straight lines drawn between either the highest prices to seek down trends or the lowest prices to see an uptrend. As long as the price does not break this line then you may have found a trend from which to profit. Whenever you draw a trend line, you must realize that the line is only good for about 12 hours or until the price breaks through, at that time a new line must be drawn to incorporate the new price. Breaking a trend line does not mean that the current direction of movement has changed, however, it does mean that trading in that direction has slowed as the market begins to correct itself.

Trends can offer profits if you are aware of the support and resistance psychology of the trend line. Traders and the market, being representative of humans, show emotion and fear all during the trading day. This fear of crossing a line drawn on a chart seems irrational until you spend some time actually watching the market work all day. As prices approach trend lines they tend to reverse providing you with an opportunity to make money. However, it is never wise to place a trade when the price is far away from a trend line due to the natural need to retrace toward the trend.

In conclusion, it is very easy to spot and draw trend lines on a chart, but it requires discipline and patience to trade and profit from these price movements. Open your demo account and put a trend line in place and as soon as the price comes within 5 pips of the line, buy or sell, based on the trend and see what happens. Conversely note what happens when you place a trade when the price is far away from the trend line. Remember to always trade in the direction of the trend.

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