Every trader wishes to understand how to predict forex trends and assess their relative strength. It is what allows us to trade with momentum rather than against it, increasing the likelihood of a successful outcome.
Unfortunately, determining the strength of a trend is not as simple as some might think. Let us say it again: the number of signs and approaches that have inundated the financial world in recent years has excessively complicated a pretty basic task.
Is it simple? Yes, it is a straightforward process that relies on the approaches and financial instruments you choose to use.
Today, we will discuss three straightforward and effective techniques that will make identifying trend strengths a lot more easy process.
By the conclusion of this article, you will have a solid grasp of trend characteristics as well as when to look for a continuance of the present trend or an impending breakdown.
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3 Effective Techniques for Predicting Forex Trend Strength
Highs and Lows Tell The Whole Story
Let’s begin by seeing where the highs and lows on a chart have emerged throughout time. In a nutshell, the link between highs and lows as they develop through time.
With this strategy, all we are doing is analysing where the prolonged swing highs and lows are inside a specific trend.
The GBP/USD daily chart is an excellent example of how something as basic as seeing how a market’s highs and lows interact with one another can indicate a shift in trend.
Keep in mind that trend shifts aren’t often so clear. However, the indicators are always present; you simply have to search a little harder to see them.
You might be wondering at this time, “This is fine and all, but how/where do we enter short?”
We need the highs and lows to interact with a critical level in a way that provides a favourable situation for this. In other words, we must convert the price movement into actionable information.
Distance Between Subsequent Retests: A Powerful Indicator of Trend Strength
Let’s add a critical level to the technique now that we’ve examined how to utilise swing highs and lows to measure the strength of a trend.
Traders in all markets where technical analysis is a standard trading approach have a common (and expensive) misperception. Someone came up with the idea that with each consecutive retest, support and resistance levels get stronger.
Multiple retests of the same level increase its visibility but not its strength. And being visible and being strong is not the same thing.
Consider this: if a level got stronger with each consecutive retest, it would potentially never break. Because if it didn’t break on the third retest, why would it be on the sixth, which is meant to be twice as strong?
It just doesn’t stack up. So, if we agree that retesting a given level several times does not make it stronger, we may easily deduce that it weakens the level, right?
No, not exactly. While a market that repeatedly returns to the same region may ultimately breakthrough, we don’t have enough evidence to say it’s likely.
Price Action Clustering: An Early Warning Sign
Last but not least, price action clusters towards a critical level. This is, in some respects, a hybrid of the two strategies we just described.
This is what we refer to as “heavy” price activity. Over the years, several traders=s have gotten extremely familiar with the concept of significant price action.
As the name suggests, this is when a market begins to apply consistent pressure to a crucial level over a short period of time.
That would result in the inverse “light” price action, which does not have the same ring to it. In any case, the goal here is to observe how the market reacts to support and resistance within a particular time frame. If trading on the daily time frame, a common timeframe might be a few days or perhaps a whole week.
If the market begins to cluster or group for a lengthy period of time at a critical level, the trend is likely to break down and reverse.
Conclusion
Determining the strength of a trend does not have to be a difficult task. Simple strategies like the three outlined above are all you need to determine if a trend is likely to continue or break down.
Remember that the three tactics listed above are just as effective in bearish markets as they are in bullish situations. The strategies described above may be used in any market and at any time.
The most important thing any trader can do for himself, whether they are trying to interpret trend strength or spot crucial levels, is to get back to fundamentals. Every market has a unique tale to tell, which may be communicated using swing highs and lows.
So not that you know how to identify forex trends, it’s time to start trading. Open a trading account with InvestFW today!
