The Forex Market can often seem confusing, especially to a newbie trader.
I remember when I first started trading, I looked at the charts and just couldn’t see any definitive structure, the candlesticks were flying in every direction, it was both confusing and overwhelming.
The fact is the markets can only ever move in three different ways, so in this article I want to share with you just what those three ways are. Once you understand this, you can go back to your chart and you will be able to identify where and when they appear.
Knowing what these three trends are will greatly strengthen your trading game, some traders have a strategy for each of the three trends, this means that no matter what direction the market is moving in (remember, it can only ever be one of these three), they are always prepared with a strategy. Whilst others take a more sniper approach to trading and only look for the best possible trade opportunities that suit their strategy and trading style.
So without further ado, let’s take a look at the three ways in which the market moves:
1. An UP Trend
An UP Trend is when the market shows a clear move in an upwards direction, this is usually after reversing from a Support area (a reversal trade) OR breaking through a Resistance area (a continuation trade).
The mistake that a lot of traders make is jumping in to a long trade when they see significant movement in an upwards direction, the thinking behind this is simple (but not smart as we will see in a sec) “The market has been moving up significantly for a long period of time, if I enter into a BUY Trade I can hopefully ride the trend as it continues up, thereby securing some profits”
Sound familiar? Most traders unfortunately go through this kind of thinking and take the trade, not realizing that actually the main bulk of this movement is about to come to an end and Sellers are about to enter the market, pushing price down. How many times have you entered a trade and price almost immediately moves in the opposite direction, taking you out. Odds are you either bought into Resistance or sold into Support.
This is why understanding where Support and Resistance areas are is so important, if you can identify the UP Trend early on, you can get in earlier and enjoy profiting from the bulk of the move. The other thing to remember is that the market never really moves just up, it moves up retraces then continues up, retraces again and continues up.
So, that’s an UP Trend, now let’s look at the opposite move a DOWN Trend.
2. A DOWN Trend
A DOWN Trend is basically the opposite of an UP Trend (as you probably figured) when the market shows a clear move in a downwards direction, this is usually after reversing from a Resistance area (a reversal trade) OR breaking through a Support area (a continuation trade).
Again new traders will jump into a short trade ‘hoping’ that the move continues long enough to see them profit. The likelihood is that the trader probably sold into Support (which again is an area full of Buyers!) a dangerous place to SELL.
How the market moves down is also the same as the UP Trend, the market will very rarely just go down into the next area of Support, but rather it will move down, retrace up, move down some more, retrace up etc.
The final way in which the market could move is Ranging (otherwise knows as a Sideways Trend)
3. Ranging (or SIDEWAYS Trend)
The final trend is quite a simple trend, but it is often one of the most overlooked and misunderstood. The Ranging or Sideways Trend, is when the market shows no clear indication of moving UP or DOWN. Instead it consolidates between Support and Resistance.
One must ask the question; what would be a stronger trade in this situation, whether BUY at Support or SELL at Resistance. Of course if you are not trading reversals but rather continuations, then you must wait for price to break out either through the top or crashing down through Support.