The feeling of being late—which investor doesn’t know that? At first, you are skeptical and cautious, and then a trend change in a share, an index, or another trading instrument suddenly takes place, and you wonder whether you should have reacted long ago, and it’s too late. The reason is that trend changes often occur after the fundamental arguments for a change of direction in prices.
Why you should always try to catch a trend
Catching the trend and entering or exiting foreign exchange trading at the right time requires luck, analysis, and strategy.
The most important rule of forex trading is a calculable risk. You should know how much money you could win but, more importantly, how much you could lose. When you know this, you are ready to analyze the forex market and apply strategies to reduce your risk. Spotting a trend helps increase your chances of winning in forex trading and reduces risk.
Those who stubbornly follow the previous trend refuse to realize that the opposite direction would have been the right one for a long time. And the numerous traders who are exclusively oriented toward charts and markets do not react to external influences such as corporate profits, interest rates, or exchange rate shifts.
This gives the impression that prices are immune to these aspects and that the trend will continue for some time. And then the change in trend is suddenly there, leaving them very little room to wiggle.
Catching a trend can often be impossible
A case in point was the 2008/2009 bear market. The reason for this, the collapse of the so-called subprime loan packages on the US real estate market, was palpable as early as the summer of 2007 – but share prices simply did not react.
In January 2008, they did it after all – and many were flabbergasted. It doesn’t have to be. Because in addition to the “fundamentals” mentioned above, which are decisive for trend directions on the stock, bond, or foreign exchange market, there are still several indications that can indicate an imminent trend change.
Basically, you should wait until a trend change has actually been confirmed on the technical chart level before turning your positions. Technical trend reversal formations often indicate and confirm trend changes, which enable an early reaction.
Market technical indicators often work like “early warning systems.” However, technical market indicators do not have a reliable divination function because they are merely mathematical derivations of the courses that are already available. But they represent price action graphically differently, often highlighting essential changes in price behavior more clearly.
How do I recognize the trend as a forex trader?
With trend analysis, you look at the past development of the exchange rate. The future development of the course can often be inferred from the past. You should also take a look at the breaking news. Important conclusions for the development of a course can often be drawn from financial policy decisions.
Once you spot the trend, you can open or close a position. The purchase of a currency pair promises a profit if the price rises ( uptrend) or falls (downtrend) since forex trading can benefit from rising and falling prices.
If the rate is going down (downtrend), selling a currency pair is profitable. Trend analysis requires you to decide on a time window (short, medium, or long term) that you are looking at.
In addition to analyzing the trend, you can also base the forecast on the analysis of the trading range. However, this is more complicated and requires a willingness to hop on or off at any time.
After spotting the trend and opening a position, you should follow it and keep an eye on the trend. If you think the trend is disappearing or turning, you should act and close the losing positions and eventually re-open them in a new direction.
Expert tip
Beginners should start with the classic trend-following method. If trends are recognized, and the trend is taken for a long time, then trading is much more relaxed, and the profits are significantly higher than the partial profits with other methods.
Traders can start trying other methods when a trend-following system is understood and implemented profitably. But no matter which trading approach is followed: a well-thought-out risk and money management with strict rules are essential and the only protection to preserve capital!
