A trend simply represents a general direction of a market.
There is a physical law stating that an object in motion tends to continue in that motion until some extreme force causes it to change direction. Price trends are no different. A strong price trend will continue in its current direction unless there is a price reversal indication, that will show up in your technical analysis – or even in fundamental analysis.
There are three stages to consider in major forex trends Accumulation, public participation and distribution. The accumulation phase is the first part of the trend which represents those who are well informed that will buy or sell. Meaning simply that if the well informed or more seasoned, experienced traders recognize that a current downward trend is coming to an end, then they would buy – and vice versa.
The public participation is essentially when the masses would recognize the same and follow suit. The third and final phase – the distribution phase – occurs when everyone else catches on and public participation increases even further. It is at this point that the well informed, seasoned investors who accumulated during the accumulation phase would begin to sell, or vice versa.
Highs & Lows
As a general rule of thumb in forex trading, the existence of a trend depends on a series of highs and lows. 2 consecutive highs, each above the previous relative high and 2 relative lows above the previous low would constitute a tentative uptrend. A 3rd relative high would confirm that forex trend. It is very important to keep in mind that forex markets do not always move in trends! They also spend a lot of time in ‘ranges’ fluctuating between already established highs and lows. A range bound market is often referred to as a ‘sideways’ market since it is neither moving in an upward trend or a downward trend.
The price during a sideways market is often simply building support for a continued move in the original direction. Drawing Trend Lines
Trend lines are drawn on historical price levels that show the general direction of where the market is heading and also provides indications of support or resistance How it works is this… In an uptrend a trend line should connect the relative low points on the chart. The line connecting the lows in a longer term position will be a support line that can provide a floor for partial retracements. The downtrend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher. It is important to be flexible when drawing trend lines and redraw trend lines whenever necessary.
Price Channels The key to this price channel is that the lines be drawn parallel to each other and the value of the price channel depends on that. Unlike trend lines, price channels should not be forced on a chart where they are not quickly apparent. How it works is this… once a trend line is established, draw a duplicate line parallel on the chart. Then move it up to the relative highs above or down to the relative lows below the trend line. If two or more fit with the line, then you may have located a valid price channel. Otherwise the market maybe too volatile – even in the middle of a strong trend, to plot a price channel. Candlestick charts contain the markets open, closing, low and highs of a specific time frame.
On a daily chart, each candle represents a 24 hour period and contains the information indicated above. On an hourly chart, each candle represents an hour… and so on. But since the forex market never opens and closes, how can there be an open and closing price? To identify this information, the chart provider will decide on a time, say 5 PM EST, as the daily open and closing time.
Keep in mind that different chart providers may have different opening and closing times and traders may notice that the charts may differ from different providers Chart Patterns & What They Mean To You
There are recurring patterns on these candlestick charts that can be observed by technical analysis. These patterns are like recurring pictures that tend to occur when a trend is starting or about to end, or even reverse its direction.
They provide an excellent visualization of the price movements and can give us a good idea of what is happening in the market. These patterns are the best gage for identifying trends in the market.