Trend – definition and basic concepts

Trend
Trend

The concept of the trend movements on the currency market is basic for every technical analysis. All tools for extracting information from the graphics (levels of support and resistance, figures, moving averages, etc.) are used with the purpose of identifying and measuring the trends in order to get the most of the relevant traffic. Commonly used phrases by the currency traders are always trade with the trend, trend is your friend, never stand against the trend and so on. That is why it is essential to know well and to form correctly this fundamental part of the technical analysis.

Generally speaking, the trend is the direction of the market quotes movement. But of course, in order to maximize the profits, the concept should be more precise. In addition, it is clear that the movements of currency pairs do not follow a certain line or direction. Frequently, the market reactions are formed by multiple zig-zag movements. It is therefore necessary to define a common, stable movement on the base of lows and peaks of these zig-zag movements. If these peaks and lows are in the upward direction, then we have an upward trend, and respectively if each low has a lower value, it is formed a downward trend.

A specific definition of an uptrend is – a series of successive peaks and lows, as any of the following parts of the chart is with higher value (the quotes of peak 2 are higher than those of peak 1 and low 2 has a higher value than the low 1). Analogically, the contrary definition is typical for a downtrend – each following has a lower quote than the previous, and each peak has a lower value than its parent. It should not be assumed that the currency pair quotes are always moving upwards or downwards.

Oftentimes, after a movement is depleted, it follows the so-called consolidation zone. This means that for a certain time interval the quotes are moving within narrow limits. Then it is formed the so-called trading range. In this time, the forces of demand and supply of the currency pair occur for a particular period in relative balance. Depending on the direction of the trend, every trader decides to open a long position (uptrend), short (downtrend) or to remain outside the market (if it is formed a narrow range of trade).

Depending on the time for which one trend is valid, it could be long (according to Dow’s theory of technical analysis this trend is valid for more than one year), intermediate (valid for one or several months) and short (for less than one month). It is important for the success of the marketing strategy to identify correctly the directions of the main trends and the appropriate adjustments.

You should know that if the trend is long, it is more difficult to be broken. So the formation and preservation of one direction of a currency pair movement can give a number of signals and opportunities to profit. The rash taking of a short signal in the opposite direction and assuming that a new long term is formed, can often result in an accumulation of losses in confirming the long-term direction.

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