Ways to Predict and Identify a Forex Trend

Forex trading is one of the most accessible and highly-traded sectors among other financial markets. It is popular with both beginner and professional traders. Despite the background or experience, at some point, all investors will need to learn how to predict and identify the Forex trend.

As an FX trader, you will have to purchase and sell currency pairs. One currency is exchanged for another one at a specific price or exchange rate. In the same way as some other financial instruments, currency pairs are mainly traded in FX trends. Users can apply a variety of methodologies and indicators to identify and predict those trends.

In this article, we will learn how to do it and what instruments (indicators) you may need to implement successful Forex strategies.

How to Predict a Forex Trend

A Forex trend occurs when the exchange rate takes a definable path to move up or down. It may happen over different time frames depending on different conditions (news, the geopolitical situation, the country’s economic health, and so on).

As stated earlier, traders can use a variety of methodologies to define FX trends. Here are some of the most efficient ones to capture them.

Moving Averages

Moving average crossover has proved to be one of the most efficient instruments to enable Forex trend prediction. The technique was designed to evaluate periods once the short-term line has climbed over or falls below the long-term moving average:

1. When the short-term moving average climbs over the long-term one, it is a sign of a higher trending price.
2. If it falls above the long-term moving average, the crossover predicts a lower trending currency price.

By evaluating these periods, one can identify the middle of the trend. This is actually why moving averages are considered to be the best Forex trend indicator when it comes to day trading.

Momentum

Momentum is another great indicator often used as an FX trends predictor. When applied together with moving averages, it helps investors calculate momentum and predict a trend. MACD is one of the most popular tools to measure the difference between short and long-term moving averages as well as compare them. What’s more, with this indicator one can calculate the FX market uptrend and downtrend using default indicator settings.

Support and Resistance

Here we have another trend predictor often used with different Forex strategies. It shows how the exchange rate moves through prior support and resistance levels. Support is the price level capped by the demand. Oppositely, resistance is the price level where the supply buoys the currency price.

To properly use the indicator, you need to consider the following:

1. When the exchange rate rises above the resistance line, it signalizes the uptrend.
2. If it moves through the support line, it is likely to be followed by a price decline.

Currency pairs fluctuate depending on the market sentiments. While the asset can be traded 24/7 across different time zones, some traders may find it hard to identify the trend. Luckily, there are some proven ways to complete the task.

Also, a good way is to combine the above-mentioned techniques. For example, it is possible to perform a blend of price action and the moving average to identify the uptrend. Another technique to identify the uptrend is to use the moving average crossover with consecutive higher moving averages. This combination is also a great way to define that the uptrend is taking place.

How to Determine the Forex Trend Strength

Identifying the trend is important when making exchange rate predictions. However, it is also crucial to understand if a defined trend is losing or gaining momentum. It will help you make better decisions on whether the support and resistance levels will break or hold the same position in the near perspective. As a result, traders can predict if the trend will continue or if the price is about to make a reversal.

Investors can use different techniques to define the FX trends' strength using instruments we have already discussed earlier. To broaden your toolkit, you can also use some proven tactics.

Microstructures, Bear vs. Bull

The technique relies on the analysis of bulls and bears dynamics within the phase of trending. When you try to estimate the Forex trend strength, you need to remember the following:

• If candle bodies do not overlap, it is a signal of a strong trend, as the price follows the same direction instead of pulling back significantly.
• Another sign of a strong trend is when candlesticks perform small or zero wicks.
• While candlesticks are of the same size, it means a healthy trend. However, when they become too large, it is a sign of the market approaching the bottom. The situation also helps to predict increasing volatility.
• Those who use daily timeframes as a part of the Forex day trading technique can sometimes witness gaps that do not close. It means that the price will continue trending.

Rejected Reversals

One should never ignore the way rejected reversals take place on Forex charts. The same applies to failed breakouts, as they can tell you much about the trend. It is very important to properly analyze failed reversals taking into account the following characteristics and patterns:

• The price never closes beyond a trendline even when it overshoots it.
• The price makes only a sideway move without an immediate reversal after the trendline breaks.
• The price makes reversal spikes that are rejected and covered instantly.
• The price makes a fast pullback into moving averages and does not stay there for long.

The Bottom Line

Forex traders can select a variety of indicators and tools to predict the trend. However, it is also important to understand whether it is going to gain or lose. So, knowing how to define the FX trend strength is also very important. Luckily, beginners and pros have several ways to analyze the trend depending on their strategy and preferable technical instruments.

From moving averages, price action, and momentum indicators to analyzing rejected reversals and microstructures – they all may help to ensure successful predictions and proper decision-making.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.