By: Christopher Lewis
When trading the Forex markets, one of the most important things that you need to know is the direction of the overall trend. While many people will write about the different trends and their time periods, the one that you should be worried about is the overall direction of the currency pair. While you can chart these trends down to 15 minute intervals, it is much simpler to focus on a longer timeframet.
One of the best ways to identify the trend is the simple trend line on the weekly chart. The reason the weekly chart is so significant, is that it takes much more to break a trend line on that time period than the smaller time periods such as the one hour chart. By following the weekly trend line, you can see where the overall direction of the market tends to be going. If you draw a weekly trend line, you will notice that it doesn't get broken very often. In fact, it isn't that rare for these trend lines to last for years on end. As an example, take a look at what the Euro did versus the Dollar from 2002 to 2006. It was a straight shot up, and a simple trend line analysis would have told you that based upon the weekly chart.
Another common way to identify the trend is to use a moving average. While the exact moving average is debatable, some of the more common ones are the 50, 100, and 200 day moving averages. By plotting these on a daily chart, you can see how over time the trend is slowly moves these moving averages in one direction or another. This shows the long-term effects on the trend due to fundamental announcements, and traders stepping in and out of the markets. It should be noted that the higher the number on the moving average, the longer it takes to move it. On the 200 day moving average as an example, it takes a massive swing and direction to change the slope of that moving average. This can help keep you in a trend for a very long time.
Better yet, an excellent way to determine the trend is by a combination of the two tools mentioned above. A lot of traders will only trade in the direction of the market based upon where a specific moving averages. For example, you may pick the 100 day moving average. If price is above that 100 day moving average, you're only looking to buy. If it is below, you're only looking to sell. If you line up trend lines with the moving average, and both tell you to buy a currency pair, it becomes very clear that the trend is moving in a bullish direction. While this doesn't guarantee a 100% success rate, it certainly can keep you pointed in the right direction and allow the markets momentum to carry you forward.
By staying in the same direction of the trend, you allow the other traders in the market to push your trade forward, and help you we more profits. This is perhaps one of the most basic and fundamental ways to make money in the Forex markets. Sadly, far too many traders don't pay attention to the trend. Don't let yourself make this common mistake.