When a collection of data points are plotted on a chart, you may start seeing the general direction in which a currency paid is headed towards. In some cases, the trend is easily identified. For example, the chart clearly shows that the currency pair is rising over time:


Figure 1


On the other hand, there will be instances where trend is much more difficult to identify:

Figure 2



Therefore, more commonly, trends tend to operate in a series of gradually moving highs and lows. Thus, an uptrend is a series of escalating highs and lows, while a downtrend is a series of descending lows and highs.

Figure 3


Figure 3 is an example of an uptrend. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend, if it does, it is deemed a reversal.


Types of Trend
There are three types of trend: Uptrends, Downtrends and Sideways/Horizontal Trends (The latter occurs when there is minimal movement up or down in the peaks and troughs). Some chartists consider that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction.


Trend Lengths
Along with these three trend directions, there are three trend classifications that have to do with time duration in which the trend is taking place. A trend of any direction can be classified as either a long-term trend, an intermediate trend or a short-term trend. For forex trading, a long-term trend is composed of several intermediate trends. The short-term trends are components of both major and intermediate trends.

Take a look a Figure 4 to get a sense of how these three trend lengths might look.

Figure 4


Trendlines
Trendlines represent a charting technique, which a line is added to represent the trend in a currency pair. Drawing a trendline is as simple as drawing a straight line that follows a general trend. Trendlines can also be used in identifying trend reversals.

As you can see in Figure 5, an upward trendline is drawn at the lows of an upward trend. Notice how the price is propped up by this level of support. You can now see how this trendline can be used by traders to estimate the point at which a currency pair will begin moving upwards. Similarly, a downward trendline is drawn at the highs of the downward trend. This will indicate the resistance level that a currency pair experiences when price moves from a low to a high. (To read more, see Support & Resistance Basics and Support And Resistance Zones - Part 1 and Part 2.)

Figure 5


It is important to be able to understand and identify trends so that you can trade and profit from the general direction in which a currency pair is heading rather than lose money by acting against them. Now that you know a little about candlestick charts and trend, we can introduce you to one of the most popular chart patterns: Head and Shoulders.




Chart Basics (Head and Shoulders)

Related Articles
  1. Trading

    5 Rules For Picking Great Day Trade Entries

    The following five rules will help traders find high profit potential, low risk, intra-day trades.
  2. Investing

    Distinguish A Stock Price Correction With A Price Trend

    We explain how you can use trend lines to help avoid market corrections.
  3. Trading

    The Stages Of A Forex Trend

    Learn how to identify the stages of the many types of trends that occur in the forex market.
  4. Investing

    Introduction To Technical Analysis Price Patterns

    To "find your game" in technical analysis, you need to be able to recognize reversals and continuations as they form.
  5. Trading

    Trading Without Noise

    False signals can drown out underlying trends. Find out how to tone them down and tune them out.
  6. Managing Wealth

    Keep It Simple - Trade With The Trend

    Often, the simple solution is the best one. Find out how easy it can be to trade with the trend.
  7. Investing

    Profit By Understanding Fundamental Trends

    Fundamental trends are an important driver of financial markets and every investor and entrepreneur should analyze them.
  8. Trading

    Identifying Market Trends

    The success or failure of your long- and short-term investing depends on recognizing the direction of the market.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center