Technical indicators can be divided into various major categories. One of these categories is known as trend indicators, which of course are used in order to determine the general trend of the market.
Using such indicators, forex traders will be able to carry out trades based on market momentum and where it is generally headed next. It is the paramount opinion that trend indicators will help traders avoid losses by and large since they will provide a big picture analysis, the so-called trend, of the market.
In this article we will lay down the details of trend trading in general to see what types of trends there can be in the forex market and then show you the best forex trend indicators.
How Many Types of Trends Are in the Forex Market?
The purpose of trend trading is so that forex traders can pick up on any changes that might occur in the overall trend of a trade before it gets too late. It is possible that when you enter a position, the trend could go into a reversal, and not always for the better. So it is crucial to make sure you can predict the next move in the market.
In terms of the turns that a trend can take in the forex market, there are three possible outcomes, as follows:
Upward Trend or Uptrend
This happens when the price of a foreign exchange trading pair begins to pick up relative to what it was when the trader decided to enter into a position. In this situation the forex trader would ordinarily opt to enter into a long position in order to profit from the trade.
Downward Trend or Downtrend
A downward trend is naturally when the value of the trading pair begins to decrease overall in comparison to what it was as to when the trader opted to enter into a certain position. The position would naturally be a short position to prevent the loss of assets as a result of the decrease in value following the downtrend.
Of course somewhere between an uptrend and a downtrend, we have the sideways trend. This happens when the price of a trading pair neither experiences serious decrease nor increase in a period of time – i.e. it goes sideways as opposed to up or down. Ordinarily, a sideways trend would not have a serious impact on the decision making of forex traders. However, traders who implement the scalping strategy can immensely benefit from the sideways trend.
Best Indicators for Forex Trend Traders
Although there are many technical indicators that can be categorized as part of the trend indicators, there are some indicators that are top choice and widely used in the forex markets.
Without further ado, here are the best forex trend indicators:
Moving Average (MA)
The simple moving average is one of the most well-known and popular technical indicators overall. In fact, the basic notion of simple MA is applied in other technical indicators used in trend trading as we will see in the following sections.
The way moving average works is quite simple actually. It is applied to the chart and after a certain period of time, the prices would be generally above or below the moving average line. Thus the general trend of prices can be detected.
Also reading: Forex chart
So the simple moving average can provide forex traders with the potential direction of the market. Clearly, if the overall trend of the prices goes above the moving average line then it means the forex traders needs to go to a long position and if the prices go below the moving average line then a short position needs to be taken.
Moving Averages Convergence Divergence (MACD)
Although similar to the simple moving average, the moving averages convergence divergence actually has two moving average lines where the prices would oscillate between them – this MACD is known as an oscillator.
Therefore, the moving averages convergence divergence can provide forex traders with information regarding the momentum of the market and when it will be bullish or bearish. The way MACD works is not too complex either. In case the MACD line goes above the signal line then it means the market is about to enter a bullish area. On the other hand, when the MACD line drops below the signal line it is indicative of a bearish trend.
Relative Strength Index (RSI)
The relative strength index (RSI) can provide the forex trader with data that is relevant to the trend of prices and also the pace or rate at which such changes will occur in the price of a trading pair in the forex market.
Similar to MACD, the RSI is also an oscillator which means it oscillates or goes back and forth between two figures. These two figures being 0 and 100. These figures can show the forex trader whether the pair is oversold or overbought. As such, when the figure for RSI is above 70 it means the pair is overbought. On the other hand, if the RSI value drops below 30 then the pair is oversold.
As such a relative strength index can show forex traders the general picture of the price movement.
Bollinger bands are rather similar to the relative strength index or RSI, in the sense that they provide forex traders with information regarding the state of being overbought or oversold for a given trading pair.
The ways forex traders can analyze the data using Bollinger bands is that when the price goes over the higher limit then it means the pair is overbought. On the other hand, when the price goes toward and reaches the lower limit of Bollinger bands then the pair is oversold.
In addition to indicating overbuying and overselling, Bollinger bands can show volatilities in the price, as to whether the prices change too fast or not.
Another oscillator on our list is the stochastic oscillator. This technical indicator can enable forex traders to find out about any possible reversals that might occur in the price movements or trends.
Stochastic oscillator uses a lookback method to compare the price in its current status with the past price for a given trading pair. This technical indicator is known as a momentum oscillator. This means it can show the momentum of the market for a trading pair or the rate at which price changes ought to be expected.
Forex trend indicators can provide forex traders with a lot of useful information about the big picture operations of the market. Such information is related to the so-called trend that the market will assume or the overall momentum related to the price.
Therefore, knowing such information can help traders make decisions before they are swept away in a reversal in prices that would incur them nothing but losses.
There are many technical indicators that can provide the trader with information about the market trend, but here we discussed the top trend indicators used in forex markets, which are the simple moving average, moving averages convergence divergence, relative strength index, Bollinger bands, and stochastic oscillator.