3 Powerful Techniques To Determine Forex Trend Strength
Every trader aims to understand trends and their strength to make better trading decisions. When we can trade with the momentum of a trend, it increases our chances of success.
However, determining the strength of a trend is not as easy as it may seem due to the multitude of indicators and techniques available. These tools have made a relatively simple task more complicated.
But don’t worry; it can still be easy, depending on your techniques and tools. You can incorporate different trading calculators into your trading to simplify the trading process.
Today, We will learn about three simple techniques that, with enough practice, will help you better determine trend strength. By the end of this lesson, you will know how to identify trend characteristics and whether to expect the trend to continue or reverse.
Features of a Trending Market
To understand a trending market, we should learn how to identify its characteristics. Some traders have made it seem more complex than it is, but in reality, it’s quite simple.
Two key patterns define a trending market: higher highs and higher lows or lower lows and lower highs.
Higher highs refer to consecutive peaks in price that are higher than the previous peaks. This indicates an upward trend where buyers are willing to pay higher prices for the asset.
Lower lows, on the other hand, are successive troughs in price that are lower than the previous troughs. This signifies a downward trend where sellers are pushing the price lower.
By observing these patterns, we can determine whether a market is trending. It’s as simple as that.
1. The Highs and Lows Tell the (Whole) Story
The most fundamental principle of technical analysis lies in the highs and lows of price movements. These highs and lows provide information about the behaviour of the market and form the foundation for understanding price action.
By examining the highs and lows on a price chart, you can understand the overall sentiment and dynamics of the market. Each high and low represents a significant point where buyers and sellers have exerted their influence, resulting in a temporary peak or trough in price.
The highs indicate the points where the market has experienced resistance, where selling pressure has been stronger, preventing prices from moving higher. On the other hand, the lows signify the levels where support has emerged, with buying interest pushing prices up and preventing them from dropping further.
By analysing the sequence of highs and lows, you can identify key patterns and trends that shape the market’s direction. For instance, an uptrend is characterised by higher highs and higher lows, indicating a sustained bullish momentum. Conversely, a downtrend consists of lower highs and lower lows, reflecting a bearish sentiment in the market.
Moreover, the relationship between highs and lows can provide insights into market psychology. A series of higher highs and higher lows signifies a confident and optimistic market, while lower highs and lower lows indicate a more pessimistic and cautious sentiment.
Understanding the significance of highs and lows allows traders to identify important support and resistance levels, make informed decisions about entry and exit points, and effectively manage risk. It forms the basis for various technical analysis tools and strategies, such as trendlines, chart patterns, and moving averages. Before starting trading on a live account, you should learn to identify the important supply and demand areas on a demo account.
While technical analysis involves considering other factors and indicators, recognizing the importance of highs and lows is fundamental. They tell the story of the market, revealing the ongoing battle between buyers and sellers and providing valuable clues about future price movements. By studying these price extremes, traders can gain a deeper understanding of market dynamics and enhance their trading decisions.
2. Gap Between Subsequent Retests: A Great Way to Determine The Strength Of A Trend
Traders often hold a mistaken belief when it comes to support and resistance levels in technical analysis. The misconception suggests that these levels become stronger each time they are retested.
However, this belief is entirely false and can lead to costly mistakes.
Repeated retests of a level make it more visible but not necessarily stronger. Visibility does not equate to strength.
Think about it logically. It would never break if a level truly became stronger with each retest. If it survived the third retest, then don’t expect it to break on the 6th retest because by then, the level would be twice as strong.
The logic doesn’t hold up.
Multiple retests don’t make a level stronger or weaker. If the market keeps revisiting the same level may eventually break through, but there is no certainty about it as well.
To assess the likelihood of a breakout, we need to focus on the relationship between highs and lows and our key level.
Why does this occur?
In essence, it indicates that demand is dwindling. As prices rise, traders become less interested in buying at higher levels, decreasing demand. Simultaneously, supply increases as traders close their positions to secure profits.
3. Price Action Clustering At A Significant Level: An Early Warning Sign
Another crucial aspect to consider when assessing trend strength is the phenomenon of price action clustering near a significant level. This concept combines the principles we discussed earlier.
“Heavy” price action occurs when a market exerts continuous pressure on a key level within a relatively short time frame.
The term “heavy” may not accurately capture this phenomenon, as it primarily refers to a pair that puts pressure on a certain support level. Conversely, we could refer to the opposite scenario as “light” price action, although it lacks the same impact.
Nonetheless, the idea remains the same, observe the market as to how it reacts to support or resistance levels over a specific period. Typically, trading spans a few days or even a full week based on the daily time frame.
If you notice the market clustering or consolidating around a key level for an extended duration, it suggests that the current trend is likely to reverse. This consolidation indicates a potential shift in market sentiment and can serve as a crucial signal for traders.
Final Words
It is not complicated to find the strength of a trend. In fact, the three simple techniques discussed above help you figure out if a trend will continue further or reverse. Remember, these techniques work well in both bearish and bullish markets. The examples used in the lesson were just for consistency, but you can apply these techniques to any market and time frame.
Whether you’re assessing trend strength or identifying important levels, the key to success in trading is to go back to the basics. Every market has its own story; you can decipher it using swing highs & lows.
As a trader, your main goal is not to predict the future but to gather clues left by the market and arrange them to increase your chances of success. These clues are derived from the natural patterns and movements of the market. By paying attention to them, you can make more informed decisions and improve your trading outcomes.