Line graph method
A lot of traders only use and candles, while observing charts, less of them use line graphs. However, the line graph is a very simple, yet practical tool that allows the trader to look at the bigger picture at the chart.
Where the bars and candles are providing specific details about the price action, like a number of pips, the line graph is here for you to aid you in identifying the overall trend.
Once in a while, it is very useful to zoom out and switch to the line graph to get the bigger picture of the market. As a matter of fact, the line graph is the perfect way to start your identification of trend direction, especially if you use the higher timeframe.
Highs and lows
Some industry experts swear by the way of analyzing charts. They believe that it is very simple and easy to understand. The traditional technical analysis implies that during an uptrend the chart keeps showing higher high and higher lows.
During the downtrend, we witness lower highs and lower lows. I have discussed various ways of How to profit from the downtrend in Forex in one of my previous articles.
Moving on to the next method of our 5 easy ways to identify trend direction, let's look into moving averages.
Moving averages are among the top trend identifying tools in the market. They are also one of the most popular trading tools among Forex traders. However, there are some points that you need to know before you start analyzing trend with moving averages:
- the length of the moving average can be highly influenced when you get a signal of the trend reversal;
- a small, or fast, moving average may provide a lot of early and false signals since it reacts too soon to even small price movements. On the contrary, a fast moving average can get you out too early, when the trend is about to reverse
- a slow moving average may give the signals too late. It also can help you ‘ride’ trends longer.
In case you want to use moving averages as a filter, utilize the 50 MA on the daily timeframe. Afterward, look for trades in the direction of the daily moving average on the lower timeframes. Alternatively, you can also combine 20 and 100 SMAs on hourly time frames as well.
Trend lines and channels
Channels and trend lines are one more great way of identifying the direction of the trend. Moreover, they can be of a good help when understanding the range markets.
Where moving averages and the high and lows analysis can also be utilized during the early trend stages, trend lines are more suitable for later trend stages. This is due to the fact that you need to have at least two touch points to draw a trend line. In addition, trend lines can be combined with MA in order to have the different angle of view on the market.
The ADX Indicator
The ADX indicator is displaying the strength of currency pairs’ trend (also see Currency correlation strength indicator), rather than the strength of weakness of a currency pairs’ price action. This implies that the ADX indicator is direction indifferent. It is only measuring whether the pair is trending or is moving sideways.
The ADX indicator comes with three lines: the +DI line which shows the bullish strength, the -DI line which shows the bearish strength and ADX line that tells you the strength of the trend.
The higher the reading of ADX, the stronger the trend is. When the price begins to move sideways, the ADX indicator’s reading drops below 25. Then, when the price is moving in some particular trend, the ADX climbs to 25 and above. ADX below 25 could also mean no trade for you if you want to just follow the trend.