Trends In The Currency Markets - How To Stay On The Right Side Of These Trends

Forex trading attracts a lot of newbies every year because it is potentially a great way to make some extra money. However only a handful will evolve into profitable traders, and many of these people will do so because they develop a system that enters trades in the same direction as the overall trend. So let me discuss how you can identify the current trend.

You basically need to use some technical indicators to help you. Just one can be enough, but it is better to have at least two or three indicators all indicating that a pair is either in an upward or a downward trend.

The first indicator you can use is the MACD indicator. This is one of the more effective indicators, and in simple terms a pair is said to be in an upward trend if it is above 0, and in a downward trend if it is below 0.

Another two indicators you can use are the Relative Strength Index (RSI) and the Stochastics indicator. These are oscillating indicators and a lot of traders use them to find pairs that are currently overbought (and therefore likely to go lower) or oversold (and therefore likely to go higher). These indicators range between 0 and 100, with 70 and 30 or 80 and 20 representing the overbought and oversold levels, depending on your own personal preferences.

However if you are using them purely to identify the current trend, they can be just as useful. This is because if the indicator is currently above the 50 level, a forex pair is said to be in a bullish trend and the opposite is true if it is below 50.

There is another indicator that you might want to consider using as well. It's called the Supertrend indicator and it clearly shows you the current trend very clearly. This indicator is either green or red at any given time, with green indicating a bullish trend and red indicating a bearish trend. It is really easy to use and you can see the trend in an instant. The only downside is that it is not available in a lot of charting software.

There is one final indicator I want to discuss that is widely available, and that's the EMA, or the exponential moving average to give it it's full title. You can use various different settings. Long term traders like to use the 200 day EMA, whilst short term traders may prefer to use the 5 or 20 period EMA.

The trend is signified by where the price is in relation to this moving average, as well as the current direction of the EMA. So in other words a strong upward trend would see the price currently standing above this indicator, with the EMA moving higher as well.

So as you can see, there are lots of ways you can identify the current trend. Ideally you want more than one of these indicators to be indicating either an upward or downward trend, because then you can be more confident when you open a corresponding trade in the same direction. The fact is that if you always trade in the same direction as the trend, you will always have the odds on your side, and therefore will find it a lot easier to make money in the long run.