Forex Trading: Market Trends and Chart Patterns
Identifying a trend on a chart is relatively simple and if you draw your trend lines correctly you will find that they can be a powerful tool. When you are drawing a trend line in an uptrend it should be drawn along the bottom of clear support areas and in a downtrend your line should be along the top of clear resistance
Support and resistance refer to the lowest or highest point a market reached before it pulled back. So, when the market is moving up and then hits a level it cannot break through that is known as resistance and vice versa for support levels.
Thus, when the market is moving up the support level is the lowest price point the market touched but could not maintain as there were too many buyers in the market. The result is that the price closed higher and continued to climb. Likewise, if the market is moving down, the resistance is the highest price the market reached but there was too much selling pressure to keep the upwards momentum and the price ended up closing below the open.
Forex Trading: Market Movements and Chart Patterns
Chart patterns can be used to identify potential large movements in the market which is the goal of any Forex trader because if you can spot them in time then you can make a significant profit. There are many chart patterns but we will look at a few of the most popular to start with.
In Forex trading market direction is determined by the strength of the buyers and sellers. Thus, if there are more buyers in the market, it will move up and vice versa. A symmetrical triangle is a chart pattern where the price’s highs and lows form opposing slopes until they appear to converge, i.e. the highs slope downwards while the lows slope upwards, forming a triangle. This means that the level of buyers and sellers in the market is nearly equal as neither has the power to push the market in their direction.
As the two slopes move closer together, this indicates that a breakout is to be expected. However, there is no indication as to which direction the market will breakout but you can be certain there will be a significant movement. To trade you would place entry orders above and below the slopes, namely long and short respectively, so that you can catch the price as it breaks out in either direction.
Double Tops and Bottoms
A double top is a chart pattern that signifies a reversal and it is usually formed after a strong upward movement in the market. It looks like an inverted “W” where the price tested the resistance level, drew back once, tried to test it again and couldn’t breakout bouncing off the resistance level again. It signifies there is a possible reversal in the uptrend because it seems that the buyers no longer outnumber the sellers.
A double bottom indicates that, in Forex trading, market movement will potentially reverse from a downtrend to an uptrend, just like the double top. A double bottom looks like a “W” and shows that selling pressure is waning and the market is likely to start climbing.
Chart patterns can be very effective in determining the movement of the market and there are hundreds of patterns you can use. When you first start out Forex trading market trends and chart patterns are the first things you will need to train your eye to identify on a chart. The faster you can spot these patterns the more money you will make.
Major Causes of Forex Trends
Achieving success by Forex trading is both a profitable and enjoyable experience, while, on the other hand, being on the losing side can be extremely frustrating and make you very anxious. It is interesting to note that experts have identified that there are certain characteristics, together with a person’s own ability, that significantly impact on which result they achieve.
Your best chance of success is to familiarise yourself with the major factors that generate Forex trends. This will allow you to make smarter trading decisions since they will be based on the many dynamics that can cause currency prices to move up or down.
Over years of research, it has been found that Forex responds to 3 main components. These are, market psychology (the feelings of traders), political developments (good or bad) and the state of the national economies (look out for words like “recession” or “boom”)
In terms of market psychology, the Forex market is heavily influenced by the perceptions of its traders. It is not uncommon for investors to seek the safety of strong currencies when political conditions become unstable. Traders are always exploring new ways to make higher R.O.I’s, which means they look to support the economies of countries experiencing boom periods.
You may have noticed that immediately after a country makes important fundamental news announcements depicting the current state of its economy the market can respond strongly. This is especially true if the figures differ significantly from that which market experts predicted. An influential country like the US has the ability to seriously impact Forex when it releases information about its unemployment, GDP and interest levels. Ultimately, a country’s currency will rise in price against others the more prosperity its economy sees.
In regards to political developments, they also have the ability to produce significant Forex trends. The main reason for this is a country’s political environment (i.e. government) often has influence on the state of the economy. If a general election sees a new political party take control and if this new government is perceived to have a negative attitude towards investment policies, then it won’t be unusual that this occurrence will depreciate that country’s currency. However we can also see the opposite where a nation’s currency will rise in value if perceived political problems are solved and overcome.
Keeping yourself informed about the political nature and economic developments of at least the major currencies will put you in better stead to make knowledgeable and improved trading decisions. Forex’s unpredictable nature to fluctuate means that making an effort to understand the core reasons of what causes this will hopefully see you making excellent profits from trading Forex.
Understanding the different factors that influence forex trends is an essential component of developing ones forex strategy.