In the Forex market, trends reflect the average rate of change in price over time. A trend is a useful indicator of where the market is headed and offers an opportunity to take action to achieve a specific target. Not surprisingly, traders consider trends to be their friend and Wall Street believes in never going against the trend.
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Graphically, the easiest way to identify a trend is through the distinct patterns formed by the price. When a trend occurs in a forex pair, price movements start to form peaks and valleys in the price chart, which you can visually identify very easily. Trend lines are one of the most common forms of technical analysis.
Different types of trends in the Forex market
Currency trends can be categorized into three types based on their direction : uptrend, downtrend and sideways trend. Trends can also be divided according to their duration : long term, short term and intermediate.
The trends continue on until there are some changes in the conditions or value. If the general trend of the market is headed upwards, you need to be cautious about taking any positions that rely on the trend moving in the opposite direction.
The Forex market is not affected as much by downturns as other financial markets. As selling is such a common phenomenon in this market, it is fairly immune to downward trends in price. You trade one currency against another, which means something is always going up even in times of financial or economic turmoil.
Short term, long term and intermediate trends
A long term or major trend lasts for more than a year. An intermediate or secondary trend can span anywhere from three weeks to a couple of months. A short or near term trend lasts less than three weeks. Sometimes, an intermediate trend can be a correction in a major trend. The intermediate trend could itself comprise of a series of troughs and peaks, each of which can be identified as near term trends. It is best to view long term forex trends on daily charts, intermediate trends on hourly charts and short term trends on 15-minute charts.
All traders look for trends when studying price data. They also try to identify the reversal point in the trend to time their purchase and sale at the most profitable level. A good understanding of trends can open up gainful trading opportunities for the savvy trader.