Application of Technical Analysis Figures Together with Trend Analysis Techniques
November 22, 2019
Trend trading is one of the reasons why most retail traders come to the Forex market. What’s more appealing than riding a trend, simply looking to buy the dips in a rising market or sell the spikes in a falling one?
But to ride a trend, one needs to be able to identify it. Technical analysis, as the art of projecting future prices based on the previous market behaviour, sets the rules for what a trend is and how to trade it.
What is a Trend?
A trend is a series of highs and lows that the market makes. Because even the strongest trends have corrections, it is essential to define the series accurately:
- Bullish trend
- A bullish trend forms a series of higher highs and higher lows. More precisely, the market keeps making new highs, while the dips don’t break the previous market low
- Bearish trend
- A bearish trend is made of a series of lower lows and lower highs. The market keeps pushing lower, while the bounces aren’t enough to break the lower highs series.
As a rule of thumb, for as long as the series holds, the trend will continue, no matter the potential reversal patterns that form.
Any trading platform offered by a Forex broker has plenty of trend indicators. Trend analysis, therefore, became the favorite way to interpret the Forex market.
How to Ride a Trend
Traders build entire strategies based on a Forex trading system that follows trend indicators. The most popular trend indicators in today’s technical analysis are:
- Moving Averages (MA’s)
- Many types of MA’s exist (SMA – Simple Moving Average, EMA – Exponential Moving Average, DMA – Displaced Moving Average), and the higher the period considered, the stronger the support and resistance levels will be
- In strong bullish trends, the price remains above the moving average and in bearish trends, below
- MA200 is considered the largest MA to use in trend analysis
- MA200 and MA50 crossing on the same chart is a bullish or bearish signal: a golden cross forms when MA50 moves above MA200, and a death cross when the MA50 moves below MA200
- Bollinger Bands
- A great indicator for trend analysis
- The price remains within the bands for over ninety percent of the time
- The ability of price to stay on the upper channel is a bullish sign
- When the price stays in the lower channel is a bearish sign
The indicators presented in this article are only some of the options traders have for proper trend analysis. Moreover, for every indicator, there are different trading strategies to be applied.
The results vary based on the money management system used. Trend analysis leads to different results, depending on the strategy used.
One of the biggest problems with trend trading is that the markets spend a lot of time in consolidation. Statistics show that ranges form most of the times, making Forex trading following trend analysis a difficult strategy to pursue.