How To Identify The Forex Trend Easily!

There is a famous saying in the UK…

“The Trend is your friend until the bend at the end!”

And of course, there is a good reason for that. Your stress levels are so much lower when you are trading in the same direction as the trend. When you identify the Forex trend and trade with it… you make money calmly and easily.

Your trades tend to spend less time in the red. You can scale in and pyramid into the trade to maximize your profits. When you get this bit right… It feels good. Life’s good. So, how do we keep finding those trends and stop ourselves from looking for the reversal all the time?

 

Spotting A Trend

As with everything in Forex trading there is no one suit fits all solution. When trying to identify the trend of a market there is no magical indicator, no tool that gets it right 100% of the time and it doesn’t matter how many times you tweak your trading rules… nothing always works. All we can do is make our best guess based on how our rules interpret the market at this time. Our rules should give us a bias that will give us our highest probability of winning the trade.

Ultimately the market can and will change direction whenever it wants. All we can ever do, is check ourselves against our rules. As long as we follow our rules and don’t make any mistakes… our trades are all good regardless of result. If we make any mistakes, we don’t continue to beat ourselves up. We look to prevent ourselves from making that mistake. That’s why we journal and that’s also why we review our journals.

Finding the trend is not a trading system or strategy by itself, it will be always only ever be one part. It is however a very useful part of any trend trading system. We also need to keep in mind that  the different techniques I’m going to share with you are really only filters and observations that identify the current trend at the time you use them. This can only be a guide as to where the higher probability of direction is. There are no guarantees.

You also need to keep in mind the bigger picture when deciding trend. We can often get confused when zoomed in believing that the market is trending in a certain direction. Only to find out later that in fact it was only in a retracement and in fact trending in the opposite direction.  Always zoom out when looking for trend direction.

 

What Do You See?

If a trend is already well established, it really can be as easy as looking at the chart. Remember to zoom out and keep the chart clean and say what you see. If you can’t give a definite answer within a few seconds, then that’s not the trending chart you wish to trade from. Yes, trading truly can be that simple.

Now there are things to be aware of, number one being that traders talk trends all the time. Although they fail to mention in what respect. My belief is that a trend on the 4hr is a short-term trend, the Daily is a mid-term trend and the Weekly is the long-term trend. For me anything under the 4hr is not trending, it’s just the current market direction. I always know the long-term trend although I trade the mid-term trend. All that means is that I will trade weekly counter trend trades. I can and do trade weekly retracements because these are trends on the daily charts.

But I always know the weekly bias and whether I am in a weekly extension or retracement…

USDCAD trending up

Step one, zoom out and look at the daily chart.

Without any lines or indicators, you can quite easily see on this Daily USDCAD chart that the overall trend is long. This is in an uptrend.

 

Identify The Swings

As a double check if you require add the major swings. This is basically showing you the trend of the weekly chart on the Daily chart which can e used as confirmation of the log-term trend…

Major swing

We can now see the swings of the weekly chart and this confirms an uptrend.

Next, we want to identify the mid-term trend. This will give us our directional bias on each chart. For this we want to see 6 – 12 months on a daily chart and again identify the swings. This time looking for either swing highs or swing lows…

Swing lows

As we can see from the chart above. The market is in an uptrend as it is making higher swing lows. This method can be used as a standalone. Or it can be used with the other two as I have shown here. The answer will always be what’s best for you and the only way to know that is trial and error.

If you are planning on trading any time frames lower than the 4hr then you may wish to know the more immediate daily trend…

 

Higher Highs, Higher Lows, Lower Lows and Lower Highs

Another easy way to spot a trending market is to look for a market that is making higher highs followed by higher lows or lower lows followed by lower highs. If we go back to that same chart…

HH,HL,LL & LL

The one thing you will have to do for this method is define what your high is and what is your low. Some of you may look at this chart and disagree with where I have put my highs and lows. That’s ok I just follow my rules.

One thing that we can be certain of is this chart is trending up! It’s making higher highs and higher lows.

 

Moving Averages

Next, we move into indicators. Some traders rely on indicators to define the trend for them and some use them as confirmation. Again, nothing is right or wrong I just want to show you the different ways, so that you can test and implement for yourselves.

If you’re trading on the lower time frames a good ema measure of a trend is the 50ema. If price is above, you are looking for buys and if it’s below you are looking for sells…

50ema

When the market is above the 50ema it is considered a bullish trend. And when the market is below the 50ema it is considered a bearish trend.

If you trade on the daily chart or possibly the 4hr then you may wish to use the 100ema as your trend direction indicator…

100 ema

 

MACD

Use the vanilla settings. 12,26,9 and put it on the weekly chart. This is designed to give trend direction for the Daily chart.

An uptrend would be defined when the MACD is below the zero line by the bars getting smaller for two consecutive bars. When the MACD is above the zero line the bars would be getting bigger. Again, it only takes two bars/two weeks to establish a trend with this method.

A downtrend would be defined when the MACD is below the zero line by the bars getting bigger for two consecutive bars. And when the MACD is above the zero line the bars will be getting smaller. Let’s take a look at a chart…

MACD Trend Identifier

 

Let’s dissect the chart above of the weekly USDCAD that we have been looking at.

  1. Two consecutive smaller bars above the zero line. This is now in a down trend using this method.
  2. The bars are getting smaller while under the zero line we have moved into an uptrend.
  3. The bars are hugging the signal line. This is range bound.
  4. Two bigger bars above the zero line. Bullish uptrend.
  5. Two smaller bars above the zero line. Bearish downtrend.
  6. Two smaller candles below the zero line. Bullish uptrend.
  7. Two smaller candles above the zero line. Bearish downtrend.
  8. Two bigger candles above the zero line. Bullish uptrend.

 

Trends

Deciding on which method to adopt is incidental. What’s important is that you pick one. Just by looking at the charts I’ve shown you, you can see that by picking trades inline with the trend would have kept you out of a lot of bad trades. None of these examples are systems by themselves, they are merely one filter that you should all be using within your system.

It will stop you fighting the trend and will keep you out of a lot of losing trades. We are retail traders, we don’t affect the trends we just need to follow them.  Too many of you believe that you are Gucci or Ralph Laurent. You’re not, you’re market stall owners. You don’t decide when the trend ends or when a new one starts. You need to wait until you clearly see the trend and then follow it.

Will you miss some of the move? Yes. Will you leave some pips on the table? Yes. Will you get more success?  Yes.  Will you live to trade another day?  Yes.

If you are new or a struggling trader and you are trying to trade against the trend… you are not contrarian, you’re not a counter trend trader. You have unresolved issues surrounding a need to be right or unrealistic results syndrome. Because there are several hundred simple trend trading systems out there that work and give consistent profits. But you’re trying far too hard to make it complicated.

Stop trying to find a system to fit your issues, it won’t work…

Email me and arrange a strategy session… let me help you start to trade properly once and for all…

callum@specialfxacademy.com


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Callum McLean

Co-Founder and Trading Psychologist at Special FX Academy
Trading Psychology Coach and Certified NLP Coach. It is my belief that trading is 99% Psychological. And it is by understanding and improving your psychology, that you can be a successful trader. Success is a formula that everyone can and should learn.
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