Forex market trends: how to define and trade against them
If you decide to start trading on the Forex market, you should learn from the basic terms and principles of making transactions, which also include the concept of a trend and trading with and against it.
Decades ago, a directional trend movement was not so massive, prices fluctuated in narrow ranges, fixing on the same values. However, today the situation has changed dramatically, most of the time the market is in motion. That’s why understanding the importance of trading with or against the trend in Forex is extremely important because it affects not only the choice of financial strategy and risk management tools but also determines the effectiveness of your work.
Therefore, in this article we will talk about such a fundamental topic, without which it will not be realistic to trade in the financial market: we will analyze what a Forex trend is, evaluate the pros and cons of trading with or against it, and learn to recognize this movement and use it to our advantage.
What is a trend in the Forex market?
A trend in the Forex market is a certain direction of price movement. If the price of a financial instrument is growing steadily, we conclude that there is an upward or bullish trend, if it falls, it is a downward or bearish one. There is also another option for changing market quotes – this is a lateral price movement, when the price either rises or falls a little, but does not go strictly up or down.
Prices in the market cannot constantly go in a certain chosen direction, so there are impulses and pullbacks in the upward and downward movements as well.
Impulse is a movement in the direction of the trend (the rate rises if the trend is up; falls if it is down). If it is more intense, reminiscent of a strong push, then the market has begun its active work. A pullback or correction is a movement that is opposite to the impulse, directed against the trend. It is more sluggish and less long, and at this time the market is resting in order to gain strength for a new powerful impulse.
Usually, a downtrend is observed in the market when each new price top is below the previous one. Another name for the considered dynamics is a bearish trend. When a bear attacks its enemy, it hits with its paw from top to bottom, just like prices in a downtrend move from top to bottom. In an uptrend, the situation is exactly the opposite: each new price top is higher than the previous level. An uptrend is otherwise called bullish, because the bull, when it attacks its enemy, hits it with horns from the bottom up, prices move in the same way within an uptrend.
The last type of trend is a sideways trend. Its other names are neutral or horizontal, but it is not the same as flat and consolidation. In trading, the flat is the name of a low-amplitude range of fluctuations. A side trend is a harmonic fluctuation with an amplitude of more than 300-350 points (by the fourth decimal place). If less than 300-350, then there is a flat. Consolidation is increasingly used as a synonym for flat, but in general, this is when the candlesticks on the chart do not line up in waves at all, they simply lie next to each other.
Trend lifetime in the Forex market
Often, when using different timeframes in the trading terminal, you can observe absolutely opposite trends. On the weekly charts, a bullish trend is clearly visible, on the daily charts – a downward trend, and on the hourly charts, there is generally a side trend. This is due to the fact that the trend is not clearly formed in an ascending, descending, or straight line, here it is necessary to take into account other factors and false signals. However, charts on higher time intervals are more important than short ones, that is, information on weekly charts is more significant and will give you more information about general trends than daily charts, and even more so hourly or minute ones.
Nevertheless, all trends are divided into 3 main categories:
- Long-term – trends that last at least 1-2 years. They are usually used by major traders and long-term investors.
- Medium-term – trends that last from a couple of months to six months. Sometimes the period may be longer. Usually, their movement is the beginning of a correction on a long-term trend.
- Short-term – trends that include price fluctuations over a short time period. Last from a couple of days to one month. There are usually a lot of impulsive price changes in such moves and they do not have any justification for the movement. Short-term traders and speculators are very fond of such trends, where they can get quick results from transactions in a short time.
Forex trend phases
Markets are fundamentally driven, that is, all past and expected events can affect the price. When a positive situation persists for a long time, this leads to the formation of an uptrend. If there is uncertainty, doubt, or there are signs of weakening, then the rapid growth stops, but sales begin, which leads to a price rollback. At this time, other traders use pullbacks as favorable moments for purchases, this pushes quotes up, then sales resume, and the price falls again. This can happen several times and lead to the formation of a correction.
Similarly, when a stable trend is formed, it is possible to single out phases that are present in most cases and will help you make effective decisions:
- Formation phase. At this stage, major and medium players begin to gain positions by buying assets at low prices. Increased demand for purchases starts to push prices up. The beginning of a trend is formed.
- Accumulation phase. Other players join the movement, constantly monitoring the situation on the market. Seeing the beginning of growth, they try to join the trend.
- Saturation phase. Latecomers are looking to catch up in hopes of participating in a movement that has been going on for quite some time. As a rule, this is no longer a good idea.
- Completion phase. The influx of new players (and money) is ending. No one wants to buy at very high prices anymore. Usually, it is at this moment that large players who have held positions throughout the entire trend close them by fixing profits. After that, either a long-term correction begins, or the trend reverses.
How to determine the trend in the Forex market?
Determining the trend on the chart using a correctly drawn line allows you to understand the direction of the price without complex tools and trade with the trend or against it if you desire.
In fact, the trend line is one of the main elements of technical analysis, which allows you to find out not only the direction of movement but also how strong or weak the existing trend is its further growth potential and the moment when the trend ends and it is time to exit the position, as well as, of course, the best moment of entrance.
In order to correctly build trend lines, you need to determine the highs and lows on the chart. Only significant peaks that are clearly visible on the chart are taken into account. Usually, after the peak we need, there is a correction (price movement in the opposite direction) by at least a third of the previous trend movement.
Next, you need to connect the most significant peaks with a straight line. It is impossible to give exact recommendations here, everyone builds according to their own criteria. The simplest and most universal way is to find the highest local minimum on the chart (for an uptrend) and the second peak following it and draw a trend line (support line) between them. For a downtrend, you need to find the price highs on the chart, respectively (the highest peak and the one next to it), and draw a line (resistance level) between them. In the event of a breakdown of the trend lines, 2 outcomes are possible. Either this is a false breakout and the price will eventually return behind the trend line, or a change in trend is observed.
Forex trend strength measurement
The trend detection methods discussed above (trend line, levels), which reveal the direction of movement, should be combined with the ability to determine how long it will continue. It would be a mistake to enter a long position when the uptrend is unstable or has already reached its maximum.
To understand how strong a trend is, you need to draw a line along the highs or lows, and then pay attention to its angle. It is optimal that it be close to 45 degrees, which indicates a smooth stable movement. If the line is very steep, then often this direction is set by the news and speculative factors, after which completely opposite movements occur or everything returns to the previous track. Steep lines are unstable and often deceptive.
The second factor determining the strength of the trend is the similarity of the waves. The price moves with small fluctuations and the correct trend will have a step-like structure (if you draw horizontal lines along the highs or lows of each wave).
Forex indicators to spot the trend
Various technical tools are also provided to help the trader, which is included in the standard set of any terminal. One of them is the Moving Average. This indicator is one of the simplest and many other indicators are based on it. The moving average shows the average value of the price for a certain period.
The closing prices of the last and earlier candlesticks can be taken into account with different statistical weights. Depending on this, there are several types of moving averages: simple, weighted, smoothed, and exponential.
Often, a moving average is viewed as a kind of support or resistance – not as straight lines, but as curves moving over time. Many strategies have been built on the basis of the moving average. Almost every one of them has a common approach:
- In an uptrend, it is better to buy when the price touches the moving average from above and continues to move with the trend.
- In a downtrend, it is better to sell when the price touches the moving average from below and continues to move with the trend.
Parabolic SAR is another useful tool. This indicator looks like a series of dots placed above or below the candlesticks. If the points are located below the price, this is a sign of an upward movement. If the points are above the price, then the movement is downward.
The parabolic is well suited for determining pivot points. For example, as soon as the first point above the price appears after the line of dots below the price, this indicates a possible beginning of an uptrend.
We should note that points are shown even in the absence of a trend. In this case, the lines of dots above and below the candlesticks will be approximately the same in length and will often be interrupted. That is, with weak trends, the indicator gives a lot of false signals. When there is a clear trend, the dots form long continuous lines. During corrections, they are replaced by shorter lines on the opposite side of the candlesticks.
Also, a proven indicator that determines a trend reversal is the Bollinger Bands. This indicator is a combination of three curves based on moving averages and displayed on an asset chart.
The boundaries of the Bollinger channel are not fixed and depend on the volatility of the financial instrument. In the absence of a pronounced trend, the price slightly deviates from the average line. As soon as the trend gains strength, the deviations become larger and the boundaries of the channel diverge.
Bollinger Bands have a useful property: about 90-95% of the time the price spends within the channel. Various trading strategies are built on these observations.
As a rule, all of them involve buying during an uptrend, if the price has tested the middle line from above and rushed in the direction of the trend. And selling during a downtrend, if the price has tested the middle line from below and also rushed in the direction of the trend.
How to determine the trend by candlesticks in the Forex market?
Traders can also determine the trend by Japanese candlesticks. In this case, the opening point of the candlestick and the closing point will act as local lows and highs.
The ideal trend, which is easy to recognize, is when the next candlestick opens higher than the previous one. The close of the candlestick should also be higher than that of its predecessor. This trend is a clear sign of an uptrend.
In general, the analysis of Japanese candlesticks indicates not the duration of the trend, but its reversal.
Trading with VS against the trend in the Forex market
One question is how to determine the current trend, but it is more difficult to decide how to act: trade with or against the trend. Let’s start with trend trading. The essence is simple – you get an advantage when opening a position in the direction of the main trend. Purchases are made on an uptrend, and sales are made on the opposite. Given that a trend usually lasts for a while, getting in and out of it in a timely manner can potentially win something.
Many market participants believe that trading with the trend is not difficult, and it seems to be safe. You move along with the crowd of traders and due to this fact, you feel more confident. It is believed that in this style of trading there is not as much risk as in the case of trading against the crowd. However, it is worth considering the frequent and inevitable course reversals, which can lead to a negative result. In addition, trend signals may be delayed. It’s hard to spot a trend before it starts. Accordingly, by the time the signal is formed, most of the price action is already behind.
Also, large bankers (market makers who form the market) can always easily turn the situation in a convenient direction and kill the whole crowd, breaking their forecasts.
Trading against the trend is more complicated. To use this strategy effectively, a trader should correctly determine the moment of entering a deal and be extremely careful. The meaning of trading against the trend is not to sell a growing asset and buy a falling asset. The strategy is based on two rules:
- When an asset is predicted to rise, most participants buy it, thereby raising the price even higher. After that, the number of purchases decreases, the growth stops, and the cost turns in the other direction.
- In the event of a fall in the value of an asset, traders sell it. When there is nothing left to sell, the fall stops, and the likelihood of a reversal increases.
In simple terms, trading against the trends is opening a trade at the most opportune moment, namely at the reversal of the value of an asset. While the majority continue to open buy trades and thereby saturate the uptrend, countertrend traders bet on the fall. And when the price approaches the oversold zone, the trader bets on growth.
What is better to trade with or against the trend in the Forex market?
Trading against the trend is not always effective, but this applies in principle to any trading strategy, because no one knows for sure where the market will move. Otherwise, everyone would only be in the black and not know what losses are. So there comes a question of which of these strategies is better to use.
Every person, including a trader, is influenced by others. That is why, when a trader moves in the same direction as the majority, he feels more confident. This makes it seem safe and easy to trade with the trend. In addition, this approach to trading is not as risky as trading against market movements.
Despite the simplicity of trend trading, there are also factors that need to be taken into account. While you are following the crowd, the big market makers can reverse the market at any time, causing your positions to become losers. Such reversals only play into the hands of those traders who trade against the trends.
The main advantage of trading against the crowd is that such traders can identify reversals in time and open effective deals. But for traders who follow market movements, it is more difficult, because you cannot determine the trend before it starts. The catch is that trend signals are late. Because of this, the trader misses the ideal moment of entry and may lose something. In other words, countertrend trading can more returns as it is much easier to catch a reversal than to spot the start of a trend, but it should be understood that it is more suitable for more experienced traders. While it is better for beginners to move with others, use demo accounts for practice and copy trading for professionals.
It may seem that we are leading to the idea that you need to choose only one of the two methods of trading. In fact, the truth lies somewhere in the middle. It makes sense to learn how to combine these two methods and not become a fierce supporter of only one of the two. This approach will give you the flexibility to take opportunities from all markets, and understanding the pros and cons of both strategies will give you the ability to handle each price move you are involved in.
Copy trading in the Forex market
Trading with or against the trend can take some time to determine entry and exit points, as well as to practice and test your strategies. As beginners, many traders sometimes make mistakes on their way to becoming professionals, but in fact, there is a more attractive way to save time and money – using Social and Copy trading in the Forex market.
Copy trading is a method in the financial markets that allows you to automatically copy trades of other participants to your account. This way of trading gives you the best opportunities without the trading skills, time, and analysis required to monitor the market and manage risk. Just find the platform that hosts your exchange in the pool of related exchanges, copy the strategy/bot of a particular trader or portfolio that you like and earn the proper passive income.
One of the popular platforms combining Social and Copy trading is eToro. The platform allows you to conduct independent trading or copy transactions of other participants. Any client can create a public portfolio and earn on the fact that other users copy his actions. In addition, with the CopyPortfolios feature, you can subscribe to an entire group of traders in one click. This allows you to diversify your investment without spending time studying each account individually.
Best VPN for safe Forex trading
In a situation of various blockages, data leaks through insecure networks, or in order to remain completely anonymous to both the government and scammers, traders are increasingly using VPNs for Forex trading. VPN provides reliable protection by encrypting the data transfer, redirecting your IP, if desired, through several servers, and also blocking data leakage in the event of an Internet connection failure. There are many VPN offers on the market now, which vary both in price and quality. After comparing and testing many options, we have selected for you one of the best VPNs for Forex trading.
Nord VPN is one of the best services that will reliably protect your Forex trading with the most powerful encryption algorithms, Double VPN, VPN+TOR, and other technologies for complete privacy. The company also provides separate servers for gaming, file transfer, and video. In addition, a large number of global servers in 60 countries provide fast access from anywhere in the world.
Click the button below to get the best VPNs deal for Forex trading:
In addition, with Nord VPN you can connect up to 6 devices to one account at the same time, so you will be able to protect all your gadgets or share your subscription with your family.
Top trusted brokers for Forex trading
A trend is nothing but the direction of the market movement, i.e. the fundamental concept of the theory of technical analysis. All technical analysis tools serve one single purpose – to understand what trend the market is currently in. It’s no secret that the Forex market cannot move in a straight line. Its trajectory is a series of undulating swings with highs and lows, or, as traders often say, tops and bottoms.
In this regard, it is important to pay attention not only to technical analysis, but also to study fundamental analysis, as well as test the chosen strategy on a free demo account from brokers, where the conditions are as close as possible to real ones, and you can understand how you like trading with or against a trend.
Also, the good news is that in the Forex market, a trader can open several accounts in order not only to try to go with the flow or against it but also to try various financial instruments and collect all kinds of Forex bonuses up to 100% on the first deposit.
Register, verify accounts and start trading with the leading Forex brokers below to compare trading platforms, select multiple instruments and check order execution times.
Exness Forex trading
Exness is a trusted online broker that has been providing its services in the Forex market for over 14 years and offers its clients trading in currency pairs, stocks, indices, metals, energies, and popular Cryptocurrencies.
To enter the market, traders can use both the familiar MT4 and MT5 terminals, as well as Exness’s own web terminal, which includes an intuitive interface with unique charting technology, as well as more than 50 drawing tools and 100 indicators. The broker also provides mobile trading for iOS and Android. The company also has free VPS hosting, which allows remote access to the trading terminal.
Clients can register accounts for retail and professional traders, as well as practice trading in real market conditions with a free demo account before entering the live market.
The broker’s website has an economic calendar. Also presented are analytical tools such as technical analysis from Trading Central (including WebTV) and fundamental analysis (news from Dow Jones).
Exness is distinguished by its reliability, which is confirmed by millions of customers around the world, and licenses from regulators such as FCA, CySEC, FSCA, FSC, FSA, etc. Try trading with Exness using our dedicated button below.
XM Group Forex trading
XM Group is an international brokerage company providing access to a variety of financial instruments such as 55 currency pairs, CFDs, stocks, gold, energy, commodities, and more.
The conditions offered by XM Group are really attractive due to competitive variable spreads, flexible leverage, and low-risk trading in micro lots available on all types of accounts, of which the broker has several: Micro, Standard, XM Ultra Low, and Shares. In addition, you can open a demo account with a deposit of $100000 to improve your skills without fear of losing your real deposit.
XM supports two of the most popular platforms in the trading world: MetaTrader 4 (MT4) and its newer version MetaTrader 5 (MT5), which are also available in mobile versions. In addition, XM provides customers with a VPS service that allows them not to worry about the speed of the Internet connection, computer problems, or other interfering factors.
XM offers its clients a wide range of currencies and payment methods. Today, XM Group accepts the most common payment ways: a bank transfer, Visa, or MasterCard, and almost all electronic payment systems. Deposits and withdrawals are carried out as soon as possible.
XM Group has accreditation from recognized regulatory bodies such as CySEC, IFSC, DFSA, and ASIC. The broker has a very attractive bonus program of up to 100% for the first deposit. You can get a special offer right now by clicking on the button below.
HF Markets Forex trading
HF Markets – before rebranding known as HotForex – is a trusted online broker that focuses on Gold Forex trading as the broker offers the best spreads and no hidden fees. In addition to gold, clients can trade 1000+ including indices, currency pairs, energies, CFDs, and more.
The broker has different accounts that meet any requirements: Micro, Premium, Fixed, VIP, and Zero Spread with no commissions and a small initial deposit to work on the well-known MT4 and MT5 terminals, which are available on desktop, web, and mobile devices versions for Windows, iOS, macOS and Android. HF Markets also provides a VPS service for a stable connection.
In addition, HF Markets has the HFcopy platform which will allow any trader to become either a follower copying the successful strategies of their peers or a strategy provider demonstrating their skills in exchange for rewards for success.
The company is governed by CySEC and the FCA (Europe), the FSCA (South Africa), and the DIFC (Dubai), which are the authoritative bodies carefully monitoring all deals. You can start your trading journey with HF Markets by tapping the button below.
NAGA Markets Forex trading
NAGA Markets is an online broker regulated by some international financial authorities such as the FCA, MiFID II, MiFIR, and CySEC, offering trading in over 750 instruments including currency pairs, CFDs, Cryptocurrencies, indices, commodities, ETFs, futures as well as real stocks.
The following platforms are available to NAGA Markets clients for trading: MetaTrader 4 and MetaTrader 5, WebTrader (for computers), and Mobile Trader (iOS and Android platforms).
Also, NAGA is one of the leading social investment platforms that allows every user to trade like a pro thanks to a special auto-copy feature.
Among the accounts, market participants can find unlimited demo accounts, real, Professional, as well as VIP. A demo account is a great way to help new traders know how to plan new strategies and get a feel for the NAGA trading platform before diving into a live account.
Traders can deposit and withdraw funds using different payment methods on the platform such as bank transfers, cards, other payment methods (for example, Skrill, P24), as well as Cryptocurrencies. Try trading with NAGA and get a special offer from TopForex.trade by clicking on the button.
AvaTrade Forex trading
AvaTrade is a large international brokerage company that is popular with traders from all over the world and offers currency pairs, commodities, indices, stocks, CFDs, Cryptocurrencies, and many others.
One of the most attractive features of AvaTrade is the presence of a wide variety of platforms that are available to all traders, including MetaTrader 4/5, WebTrader, AvaOptions, and AvaSocial – a CopyTrading platform, AvaTradeGo, and Auto Trading – platforms for automatic trade, including ZuluTrade and DupliTrade. The AvaTrade platforms are also available on mobile devices. The company supports Android and iOS (iPhone and iPad) systems.
AvaTrade offers only two types of trading accounts: real and demo. The latter has a balance of $100000 to try trading 1250 instruments, test trading strategies, and compare different platforms.
The broker is regulated by several international and regional financial authorities such as ASIC, FSA, Abu Dhabi, and the British Virgin Islands regulators. You can learn more about trading with AvaTrade and create your own portfolio by clicking on the button.
Forex Market Trends - FAQ