Starting as a beginner in the forex market, you might have heard about the statement, “The trend is your friend.” You have to trade with the flow of the trend; why enter a short position when the prevailing trading is going upward. Today, a lot of amateur traders are facing a huge challenge in finding the direction of the trend. Instead of riding with the trend trading, they are chasing the trend. Where do you belong?
Peradventure, you are not a trader that likes following the trend; you can combine trend trading with momentum to get better results. Importantly, knowing the direction of the price and the stronger part of the market is an essential skill every trader must possess. To help you in your trading career, we will expound on four ways to determine the direction of the trend. You can use whatever one that suits your trading strategy.
Trading the highs and lows of the Market
Trend Trading with the lows and highs of the market is one of the simplest but effective ways to trade. Besides this, you can effectively use it to determine the direction of the trend. The strategy is all you need to understand the price chart.
The basic principle remains that in an uptrend, you have higher highs since buyers are the majority and are pushing price higher. Furthermore, the lows in an uptrend become a higher point because buyers are buying the previous dip. It works in a similar fashion for a downtrend. You get a lower low when there are surplus sellers are moving the price to lower lows because buyers are not interested in the market.
The ADX Indicator
No indicator is as potent as determining the direction of the trend as the ADX indicator. It displays the strength of the trend of the market instead of the weakness of a currency pair. In order words, the ADX indicator does not consider the direction but tells you the strength of the trend. It tells you whether the currency pair is moving sideways or trending.
The indicator has three different lines, which include the –DI, +D, and the ADX line. The ADX lines tell you about the strength of the current trend. However, the +D and –D lines represent the bullish and bearish strength of the currency pair, respectively.
To know the direction, you have to understand the reading of the ADX. The higher the reading, the stronger the trend of the market. However, if the price of the currency pair is moving sideways, the reading of the ADX indicator will drop below 25.
Nevertheless, if the price is moving towards a particular direction, the ADX line will move above 25. Therefore, whenever you observe that the ADX is below 25, it is a sign that there is no trade currently if you decide to follow the trend. The ADX indicator helps to determine the direction of the trend easily without reading any chart pattern.
Using Moving Averages
Another useful tool to use to determine the direction of the trend is moving averages. Undoubtedly, it is one of the most common tools used by many traders. Importantly, it is great in identifying the direction of the market, especially if you like a clean chart when trading. Nevertheless, there are certain things to consider when using moving averages to determine the trend direction. Here are three things to consider as it relates to using moving averages.
• The moving average length has a high impact whenever you get a signal as the market changes direction
• When you use a fast-moving average, it generates both early and false signals since they react to price faster. Alternatively, when you use a fast-moving average, the likelihood of you getting out of a trend that is about to change is high.
• Lastly, if you use a slow-moving average, you might get late signals. However, the good side is that you can ride through the trend since it filters false signals or the noise in the market.
Look at the screenshot below, you will observe the 50 EMA (exponential moving average) and that the price is always above it during an uptrend. Whenever price is below the moving average, it is a downtrend. You can use the 50 EMA as a filter by using it on a daily timeframe. Here the only valid trades are those within the daily moving average on the lower timeframes.
Using channels and Trendlines
Lastly, on the four ways to determine the direction of the trend is by using channels and trendlines. These two are important ways to know the direction the market is moving. Besides this, you can also use them to understand a ranging market.
In as much as you can use the highs and lows along with moving averages during the early stages of a trend, trendlines are more suitable for late stages of a trend. Traders use it this way because a trend is only valid when it touches two points.
Depending on your trading strategy, you can use trendlines to identify when a trend has changed. A simple way is to identify that is when price breaks through your trendline; it can signal a new trend is about taking place. Furthermore, you can combine trendlines with moving averages since they have complementary characteristics.
Summary Of Trend Trading
At times, going with the flow is the best option irrespective of the current wave. Following the trend of the market is a sure way of profiting. The trend trading is like a friendly way to operate and going against it only means you are its enemy. While traders have their different strategy, trend trading is one that has resonated with a lot of traders because of its simplicity.
Trading can be a whole lot of fun if you know the right tools to use. Here, we have important trend indicator mt4 and tools to help you determine the direction of the trend besides the four we have mentioned. These tools have undergone various backtesting and guarantee the best possible result in the largest financial market in the world.