Trends simply help us anticipate market activity. This allows us to get into a trade early and ride the upward trend until the peak. It also prevents us from staying in a position too long and end up losing some gains. By using trend lines we’re determining the peak so that we can get out at the highest point or the valley so that we can buy in at the lowest point. In short, we use trend lines to attempt to buy low and sell high. Of course, if you follow a downward trend, you simply do the converse.
In general terms, there are three trends we’re going to look at. Whether it is the forex market or the stock market, prices basically move down, up, or sideways. Specifically we’ll be talking about the end of each trend because that is when trading activity needs to take place. We will look at downward trends first because they are going to help identify the best place to enter a position. In discussing how to use trends to trade forex, you want to enter the position right after a downward trend has turned back up. The expectation is that we buy at a very low point and ride the new upward trend to its peak.
During a typical downward price fall, you will find all of the peaks going lower than the points right before them. At the bottom of this run, you’ll find one peak rising above the previous one. This represents a potential swing back to an upward price trend, and that is your buy point.
Once you’ve made your purchase, now it is time to ride the new upward trend to the top. The first question that should come to mind is, “How do we know when we’re there?” Since you don’t want to stay in a position too long and give back some of your price gains, you need to be able to identify where the trend stops. An upward price trend will have peaks that are higher from one point to the next. The top is going to be the point where one price peak drops below the one before it. If you identify the downward turn correctly, you’ll sell your position and retain the gains you experienced as the price climbed. The process is then repeated as you ride out the downturn trend until it hits the bottom.
The last trend we need to discuss is the sideway trend. This is essentially an interlude between up and down trends-a calm spot in the market. What do you do when there is no definitely upward trend or downward trend? While you will have peaks and valleys in a sideway trend, you will not have large gains available. Whether or not you trade during this trend is something to be decided based on how large of a profit potential is present in the peaks and valleys. Typically, it’s probably not worth the risk to trade in a sideway trend. Basically, you’ll use these trends as a potential early warning to a shift from the previous trend.