What is a Trend in Forex Trading and How to Identify
In all financial instruments, prices can move trending or trading.
- Trending. Prices move according to certain trends. Can be an uptrend, where prices have a tendency to rise. Or downtrend, where prices tend to continue to fall.
- Trading. Prices move back and forth in a narrow range (sideways). When seen on the chart, prices look flat
To identify trends easily, you can draw using the tools available on your trading platform, namely TRENDLINE. Uptrend is made by connecting two support points (lower limit). Whereas the downtrend is made by connecting two resistance points (upper limit). If the price breaks the trendline, it can be indicated that the price will form a new trend.
Trends can be different when viewed from different time frames. As explained in Dow Theory, prices can have a Primary trend, Secondary trend and Minor trend. For example, now we can see that prices are cheap, and there are signs that the market is starting to rise.
This relates to the time period in the Chart that we use. Generally in each trading platform, we can see charts in a period of 1 minute (M1), 5 minutes (M5), 15 minutes (M15), 30 minutes (M30), 1 hour (H1), 4 hours (H4), 1 day (D1), 1 week (W1), or 1 month (MN)
If you frequently change chart time periods, you are usually confused, as happened in the previous illustration. For example, on the M15 chart, you see the price is bearish, when you look at the H1 chart, it is actually being sideways. When you try again, H4 shows bullish. Whereas W1 might show bearish. Then which one should we follow?
We should use a time frame that suits our trading style, including:
- Scalper can enter the market at any time. The important thing is the cut loss discipline and has a take profit point. This type of trader usually uses M5 or M15 time frames.
- Daytraders who open positions and close positions in a day usually use an M30 or H1 time frame.
- Swing Traders usually make long-term transactions using H4, D1, W1, or MN according to the timeframe required. Ignore shorter time frames. Because the shorter the time frame, minor trends can be misleading
The important thing is that you must be consistent with your trading style, including using time frame periods. For example when you open a position using the Daily time frame, it means that to determine when you close a position you must use the same time frame (D1). If you instead use the M15 time frame, you could be misinterpreted. So you should discard the habit to frequently look at charts in different periods. In a way you can be affected. Only use one time frame consistently.
The thing to remember when you use a time frame with a short period is that you must always pay attention to the trends of the main trends that are happening (Major trends). If you open a buy position based on the M15 time frame, but if the major trend for example shown in H4 shows that the price is declining, you may be trapped in a buying position at a high price. It is true that you can open long positions based on the M15 time frame, but often the upward price movement is very limited. For that it is not wise if you fight the major trend that is happening.
You should see the market as a big picture. Professional traders should NEVER FIGHT THE TREND. Even if you are a trader, if the market is bearish, it is not wise to still force to enter and trade with buy positions. It's okay if you have experience. If not, the results may only always be cut loss. It is best if the conditions of the "universe" are supportive. So always seeing the major trend is highly recommended
As a tip you can use multi time frames at once. One as your main chart, as a guide to open or close a position. The second chart with a longer period of time to find out the major trends that are happening. If the chart with a shorter time period recommends opening a position that is opposite the major trend, you can reduce the capital used to reduce risk. You could also better wait until the shorter chart has the same trend as the longer chart. Or stay in, but by setting tighter stop loss and take profit points
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