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Forex Education | Forex Guide

 

TREND LINES AND TRADING PATTERNS

 

How do you start recognizing Forex patterns and trends?

 

The number of basic trends is limited. They can be up, down or flat. What makes it more difficult is that these trends can be hidden by erratic or volatile currency rate changes, or by the time interval for which you are trying to identify the trend. The first thing to do is to ensure that you have the right “window” of data. For example, if you are trying to identify trends happening over one or two hours, then a graph showing what happened over the last five minutes is unlikely to help.

 

When does a trend exist?

 

In general, we’re looking for the overall direction of a currency rate to be up or down. In both cases, there may be (many) small price “reversals”, where momentarily the exchange rate moves a little the other way. On the other hand if there is a trend, the currency rate will then move back to the direction it was moving before and move more in that direction.

 

Traders speak about “reaction points” for example for upward trends. These are the points where the currency rate dips momentarily before moving upwards again. The trend is truly upwards if you can connect up these “local lows” to also make a trend line that steadily moves upwards. Similarly for downward trends, there are “rally points” or “local highs” where the currency rate increases temporarily before continuing to move downwards. If these local highs can be joined by a trend line that consistently moves downwards, then the trend becomes clear.

 

What does a trend line tell you?

 

Depending on whether the trend line continues as time goes on, you’ll know more about the probability that any particular trading decision will be the right one. If the trend line continues, then you might choose to start additional trades like the previous ones to capitalize in the same way. If on the other hand the reaction points start to show a downward trend or the rally points an upward one, then this may be the moment to stop your current trades and take the profit – and perhaps even start trading by selling the currency concerned instead of buying it, or vice versa.