What is trend?
Learn what trend is and how you can use it in your trades.
* Trading is risky. Your capital is at risk.
You may have already heard popular phrases like “The trend is your friend” and “follow the trend”. But what is a 'trend', exactly?
Recognising a trend helps you make informed decisions and find clearer trading opportunities.
In this short guide, we'll outline what trend is, how you can spot a forming trend and how traders use trend to maximise their profits.
Key takeaways
Success in the forex market means understanding the fundamentals, picking the right broker and platform, and building a strong trading plan.
Managing risks is key in forex trading. Using stop loss and take profit orders is vital to safeguard investments.
Key takeaways
In its simplest definition, a Trend means the direction of the market. In more technical terms, a Trend is the direction of successive tops and bottoms.
There are three main types of trends: uptrend, downtrend, and sideways. During an uptrend, there are higher highs and higher lows. On closer inspection, one can notice that each top is higher than the previous top, and each bottom is higher than the previous bottom. An uptrend is likely to continue in the same direction.
In a downtrend, there are lower highs and lower lows. On closer inspection, one can notice that each top is lower than the previous top and each bottom is lower than the previous bottom. Just like uptrends, the downtrend is likely to continue in the same direction.
When the market is not trending, it doesn’t move upwards or downwards. Instead, it moves sideways. On closer inspection, one will notice that in a sideways market there are approximately equal highs and equal lows. Another way of defining this sideways movement is by calling it a range. Unlike uptrend and downtrend, a range is more likely to break out either above or below the sideways pattern.
How do you identify a trend in trading?
The best way to identify a trend is to draw trendlines which connect a series of highs and lows. In an uptrend, draw an upward trendline from one low to another successuve higher low. In a downtrend, you do the opposite with a downward trendline connecting lower highs. It is always best to connect at lease two points to make the trendline valid
In a range-bound market with no trend, you will draw horizontal trendlines. These indicate clear areas of support and resistance.
How long does a trend last?
Every market will have a trend, although you may need to examine different time frames. For example, a one-day chart shows a sideways market. However, there may be volatility on a shorter time frame, say the one-hour chart. A trend can therefore last for seconds, days or months.
What markets are best for trend following?
Many trend following traders pick the major currencies. This is because these pairs are more liquid than other currency pairs. The more liquid a market, the more price movement we can expect. This means there should be better opportunities to trade as prices will move strongly in one direction.
What is a trend trading strategy?
Trend followers aim to capture the middle of a market trend for profit. These traders don't care if the market is going up or down. However, they need to practice good self-discipline to follow precise rules so they are not swayed by market moves
Trend followers use technical analysis tools to help them identify trends. These include Moving Averages and Bollinger Bands.
Frequently asked questions
Look at the price chart. If it's making a series of higher highs and higher lows, the market is in an uptrend. If it's making lower highs and lower lows, it's in a downtrend.
A price bouncing between two roughly equal levels is 'ranging'. The distinction matters because the strategy changes completely depending on which one you're in.
A trend takes time to build. A spike is over in hours or days. The difference is structure: in a real trend, price pulls back, finds support, and then pushes higher again, like a staircase.
A spike just goes straight up and comes straight back down. One gives you entries. The other gives you regret.
For new traders, we recommend trading with the trend. "The trend is your friend" is the oldest cliché in trading and it's still repeated because it's still true.
Fighting a strong trend is one of the fastest ways to burn through a trading account. Once you understand how to trade with it, then you can start learning to spot when it's ending.