What’s Trending? – Identifying Up Trends and Down Trends

One of the keys to success for trend traders is finding out what’s trending in the markets. In the forex world, our currency pair is dancing on the dance floor (the chart). One of the ways to forecast its next move (or moves) is to find patterns in its previous moves. Since we have all the history of its movements right in front of us in our chart, the easiest way to find the patterns is by drawing lines and interpreting them.

Now the question is, what’s trending on the dance floor?

I’m going to turn to my good friend Twitter to find out. Let me see… at the time I’m writing this the trends are #ILovePeopleThat, #TheBestFeelingIsWhen, #TheVoice … Wait a minute. Is Twitter the write place to look for trends in the forex world? I guess not.

What’s Trending in the Forex Market?

In the forex world, the most well-known expression is, “The trend is your friend.” A trend on the forex dance floor (chart) is basically the direction in which the currency pair has been moving for a while. The idea behind it is that the pair will probably continue to trade in that direction until it hits an “obstacle.” These obstacles are called support and resistance.

Of course, depending on the time frame of your chart, you may see different trends for different periods of time. For example, you may see a downward trend in the 1-hour chart of EUR/USD on April 15, 2011:

In this hourly chart you can see Downtrend, trending on an hourly basis.

But if at that very moment, you switch to the daily chart of EUR/USD, you will see that the pair is on an overall uptrend, with the downtrend being a temporary minor trend.

In the daily chart you can see Uptrend, trending on a daily basis.

In other words, on an hourly basis, the pair is moving downward, but in a longer-term daily time frame, the pair is seen to be in an uptrend.

So as you can see, trends can be long term, short term, upward, downward, and even sideways. As the first step in determining the trend, many traders check out a long-term time frame like the daily chart of each currency pair, look for the strongest trend in its direction, then eventually move to shorter-term time frames. However, some other traders do the opposite and move from a shorter time frame to a longer one (zoom out).

Trading in the direction of the trend on the daily chart is like riding a bicycle with the wind at your back. You don’t want to go against the wind, do you? By trading with a trend, you will have the momentum of the market behind you.