Trend analysis is an indispensable function of the successful Forex trader. Just like a good mechanic or carpenter, having the right tools in your toolbox will make all the difference in your ability to break down trends and trade in the direction of established trends.
Following are some essential Forex trend analysis tools to include in your toolbox:
1. Mark the trends using trend lines
Using multiple chart compressions, decide on the overall direction.
2. Use moving averages to distinguish trend direction
Monitor these averages on one-week, four-hour, and one-hour charts to establish a panoramic view of trend direction.
1) Place a 13 simple moving average (SMA) on the week chart to establish the long-term trend. If the market is above the 13SMA, it indicates an uptrend; if the market is below the 13 SMA, it denotes a downtrend.
2) Place a 13 SMA on the four-hour chart.
3) Compare the week and the four-hour charts. If they are in agreement, and there is the space of 20 degrees or more between the four-hour chart and the market, then it should indicate that trades will hold longer so you can expect a better run.
4) Place a 55 SMA HL/2 on the one-hour chart. Look for the one-hour SMA to move into agreement with the four-hour chart. When it does so, you will get a pretty clear picture of trend direction.
Remember that trend direction is relative to the chart you use and the pips you target. Always maintain a sensible risk/reward ratio so that profits from several favorable trades aren’t wiped out in a single trade that goes against you.
Trading in the direction of the trend improves your success rate. As with any other profession, however, tools only improve productivity when you understand their proper use and limitations.