With the vast market that makes up Forex trading, many dealers adopt their own tried and tested strategy before starting to deal. There are many different approaches but the one thing in common between every investor is that they all will have some degree of trend analysis.
With Forex dealing based on pairs of currency, with one being traded off against the other, it is incredibly useful to be able to identify patterns of behaviour as this will help to predict future values. Trend analysis, while sounding like a modern technique has been around a long time with Charles Dow using the same methods over 100 years ago.
The most basic method is to plot peaks and troughs on a simple chart. These are called `pivot points` and show where the currency reversed its progress even if the change was only short-term. By charting back and drawing a line through recent highs and recent troughs, it should be possible to identify whether the currency is on a general upward trend or whether it is gradually spiralling down.
However, that will only identify the most basic of patterns and does not take into account the length of the trend. Bollinger Bands are another way of looking at trends with lines drawn above and below the currency pairing. This method is very popular as it allows traders to rapidly visually identify currency pairs which are stuck within their range as well as seeing the moving average pattern. By keeping an eye out for tightening bands, smart traders can also spot when a currency is likely to jump.
Moving average lines are a third way of looking at trends and are often used alongside Bollinger Bands. Also known as Simple Moving Average, SMA, the method provides details of the average closing price over a specified period of time. Many traders opt to track movements over either 20 or 50 days but those planning on long term bets can also view 200 day figures. Whilst SMAs are very beneficial for identifying past peaks they offer no insight into forthcoming movements. However, a more complex tool, known as Japanese candlesticks, is available to be used in conjunction with other methods to provide an overall picture. Many traders suggest that if attempting to predict a trend, the figures should be checked by using at least three methods.
It is possible to predict trends, from just the most vague of general overall movements to more detailed indepth patterns. Without question, keeping up to date with forex news is a vital resource as the more reliable information a trader has, the more likely he is to be able to predict a trend. Remember: as many traders say, `the trend is your friend”.