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| A Trend in GBP/JPY pair. |
🙋♂️Hello dear traders. ✍In this article, we will discuss the
"trends" known as the "trader's friend" in the forex
market. Yes, you read it right, they call it the "trader's friend."
It's like finding a compass in a lost forest. When traders spot a trend, they
start following it. If you identify the main trend, you've already accomplished
a part of the task. Now, let's try to answer these questions:
❓ What is trend?
❓ How many types of trends are there?
So let's start:
What is Trend?
The overall direction of a financial product is referred to
as a trend. In the financial markets, a trend indicates a situation where 🚀the
price movement of a currency pair or another financial instrument shows a
consistent tendency in a certain direction. A trend cannot be observed as a
smooth line or curve on a price chart within a specific time frame. Charts
generally do not move in straight lines either upward or downward trends.
Instead, charts often move in a series of ups and downs resembling a zigzag
pattern.
Trends are often characterized by fluctuations and ups and
downs on a price chart rather than appearing as a smooth line or curve. Charts
can exhibit oscillations and retracements while indicating the general
direction of price movements. Therefore, it is important to consider the zigzag
movements on charts in order to understand trends accurately.
What is a Trendline?
📏Trend lines are typically drawn by connecting the low points
or high points. These lines help determine potential turning points where the
trend on the price chart may continue or reverse. A trend line is utilized to
indicate the overall direction and slope of price movement. Its purpose is to
provide a clearer representation of the general trend beyond the price
fluctuations on the chart. Traders use trend lines to identify trends,
establish support and resistance levels, and make efforts to predict future
price movements.
📈In a bull trend (uptrend), the trend line is typically drawn
from below the price chart, indicating a line where prices generally move
upwards. 📉In a bear trend (downtrend), on the other hand, the trend line is
usually drawn from above the price chart, representing a line where prices
generally move downwards.
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| Trendlines in Bullish and Bearish Trends in EUR/USD Pair |
How many types of trends are there?
Let's state it directly: There are three types of trends:
📈 the bullish trend/
uptrend,
📉 the bearish trend/
downtrend,
📊the sideways/ horizontal
trend/ range-bound trend. I think that was a quick response.
Bullish Trend (Uptrend):
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| Uptrend and Trendline |
📈An uptrend in the Forex market signifies a situation where
prices consistently move upward over a specific period of time. In an uptrend,
the price reaches higher levels, forming new 🗻 ascending highs - higher highs(HH).
While progressing towards new peaks over time, there can also be temporary
pullbacks called corrective declines. Each corrective low price level is higher
than the previous one, and they are referred to as "ascending lows"
or "higher lows(HL)." In an uptrend, the formation of
ascending lows often presents buying opportunities. Traders aim to profit from
the strong upward trend in an uptrend.
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| Higher Highs(HH) and Higher Lows(HL) in the CHF/JPY Pair |
An uptrend is determined using technical analysis tools.
Tools such as charts, moving averages, and trend lines assist in identifying an
uptrend. A trend line is drawn by connecting at least two ascending lows, and
it is used to identify potential support levels for future downward movements
in price. The strength of the trend is confirmed by multiple tests of the trend
line without a break. If the price breaks below the ascending trend line and
this breakout is confirmed by the closing price, it is believed that the
uptrend has come to an end. The break of the trend line can indicate a
potential trend reversal or the beginning of a downtrend. Therefore, traders
should be cautious and patient when the trend line is broken, while also
considering other technical indicators to support their decisions. An uptrend
represents a strong market inclination and is valuable information for market
participants.
Bearish Trend (Downtrend):
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| Downtrend and Trendline |
📉A downtrend is a significant price movement pattern commonly
observed in financial markets. This trend refers to a period in which prices
consistently exhibit a downward inclination within a specific time frame.
During this period, the downward movement of prices in line with the downtrend
presents selling opportunities for traders.
At the beginning of a downtrend, there are typically
downward movements observed from a specific price level. These declines
manifest themselves as the lowest levels reached by the price within a certain
time frame progressively getting lower, forming new ⚓descending lows - lower
lows(LL). These points serve as crucial reference levels within the
downtrend. It is not expected for price declines to be continuous in a
downtrend. Occasionally, temporary upward movements can occur within the
general direction of the downtrend. These upward movements are referred to as "corrective
rallies" or "retracements." Each corrective rally has
a price level that is below the previous corrective rally, and they are called "descending
highs – lower highs(LH)." These corrective rallies are considered
temporary pauses in the downtrend. However, it should be remembered that these
rallies are temporary and the overall trend is expected to continue. Traders
evaluate these corrective rallies as selling opportunities and take positions
that align with the downtrend.
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| Lower Lows(LL) and Lower Highs(LH) in the AUD/CHF Pair. |
Trend lines are used to analyze price movements in a downtrend.
A trend line is drawn by connecting at least two low points and indicates the
expectation that the price will continue to stay below this line. The trend
line provides traders with important information about the direction and
strength of the trend. Drawing the trend line correctly guides traders on the
continuity of the trend and potential support levels. To confirm the strength
of the trend line, it is observed that the line is not broken and the price
reverses when it is tested for the third time. In such cases, the trend line
can be considered stronger and more reliable. It is more sensible to use other
technical analysis tools and indicators alongside the trend line to confirm the
strength and continuity of the trend.
Sideways/Horizontal Trend (Range-bound Trend):
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| Sideways Trend and Trendline |
📊A sideways or horizontal trend indicates a situation where
prices move around the same levels within a specific time frame. In this trend,
price levels generally follow a horizontal trajectory and remain limited to a
certain height. Additionally, ascending or descending trend formations are
rarely observed. In a sideways trend, the formed highest and lowest levels
often remain close to each other. In such a scenario, there is no clear trend
direction observed alongside price fluctuations within a limited range. Typical
trend formations like higher highs, lower highs, higher lows, and lower lows
are mostly absent in a sideways trend. A sideways trend often signifies a state
of market uncertainty. Predicting price movements in terms of timing and speed
becomes challenging as prices fluctuate within a specific range, and a distinct
trend direction cannot be clearly determined. During this period, the market
can exhibit indecisiveness and move within a horizontal range instead of a
rising or falling trend.
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| Trendlines in the EUR/GBP Pair. |
🌐Support and resistance lines play an important role in a
sideways trend. Support levels follow a horizontal trajectory at points where
the price declines, while resistance levels follow a horizontal trajectory at
points where the price rises. These support and resistance levels indicate that
the price is moving within a limited range and consolidating in a specific
area. In a sideways trend, these levels reflect the tendency of the price to
stay within this range. Traders who seize such an opportunity benefit from the
price fluctuations within the range by monitoring the support and resistance
levels. Trading within the price range is more convenient and easier than
waiting to determine the trend direction.
In this trend, the market shows upward and downward
movements within a specific range. Prices fluctuate within this range,
transitioning between support and resistance levels. However, at the point
where the sideways trend comes to an end, the market transitions into a new
rising or falling trend. At this point, a breakout of the price in a specific
direction or the breach of a significant support or resistance level indicates
the beginning of a new trend.
Read more about Trends in this article: Dow theory