All Financial Wisdom
Forex Trading: The Key Lies in Trends
We have already gone over some of the main tools that will help us to interpret graphs, but before launching ourselves to introduce trades in Forex, we must take a step back and understand the essence of any trades in financial markets: detecting a trend and adding to it.
The power and importance of market trends should never be overlooked, because in their understanding, the options for having a higher percentage of positive trades are greater. That is why we are going to stop today in understanding how to detect trends and adapt our trades to them.
What are trends?
As a general rule, the market always moves in trends, whether they be bullish, bearish or side. In fact, to speak of lateral tendency is somewhat ambiguous, since a lateral market is nothing more than a market without definite tendency, in which it is convenient not to trade if we do not dominate techniques that work well in these types of markets.
Let us focus on bullish and bearish trends. A bullish trend occurs when the highs and lows of the “sawtooth” that draws the price are increasing, while a bearish tendency occurs when these are becoming smaller. That is, an uptrend is when the price rises consistently, and bearish when it goes down.
The essence of a good trade lies in being able to detect these trends as soon as possible and to join them. Do not forget that a trend will always be more likely to continue in the same direction than to turn and change.
Surely you have heard a thousand times that advice of “always trades in favor of the main trend.” Although this theory may be evident, it must always be very present, because it is a common mistake to “want to turn the market” when one begins to trade.
The reason for that will to turn the market is clear: as we have to “rise” to the trend the sooner the better, is there a more optimum moment than to detect the exact point at which it will start? But getting to master that art is not simple because it is customary that after a sustained trend, especially if it has been prolonged over time, the market will maintain a period on the side before returning to a certain direction.
In addition to the indicators we have already seen in previous articles, such as the classic moving averages, to clearly identify trends in the graphs we use what are called trend lines. The trend lines are just a visual guide that we draw to see that the market is in a bullish or bearish trend.
In bull markets, the trend line is drawn by joining the rising price minima, while in bear markets the decreasing maxima are joining. Like any line, the trend line must have at least two points (that is, two consecutive minima or maxima), and it is even recommended that the trend line be confirmed by a third point to be considered valid. Of course, the more time that has passed, and the more or less maximum or maximum in the line, the better trend line.
How do we then use the trend lines? Well it is very obvious that its use will be very similar to that of the supports or resistances, they mark areas where the price will tend to be maintained in its current main direction, being able to establish good opportunities to enter the market.
Similarly, a break in a trend line may be an unmistakable sign that the current trend is losing strength and there could be a lateralization or a turn of the trend at any time.