What is a Trend?



What is a Trend?

A trend or trend line is probably one of the most common types of technical analysis in forex trading. It has no doubt been underutilized as well. Trend line is the direction of the price of a currency or market heading and it varies in length from short to intermediate and, to long.

If a trend line is drawn correctly, it can be very accurate as any other methods but unfortunately, most traders do not do that.

There are three types of trends and they are uptrend or higher lows, downtrend or lower highs and sideways trends or ranging.

In order to draw a proper trend line, you have to locate two or more support areas (valley) and join them by drawing a straight line starting from the bottom right up to the top for an uptrend line. As for a downtrend line, you have to locate two or more resistance areas (peaks) and join them by drawing a straight line starting from the top right down to the bottom. If both the top and bottom trend lines go horizontal instead of up and down, it is a sideways trend or ranging.

Figure below shows an example of the three types of trend lines.


When one line is created by trends in the highs and the other line in the lows for the currency price, a channel is formed. A channel can also be formed if the price is traded sideways or in a range between these two lines. Like the trend lines, there are also three types of channels which are the ascending channel, the descending channel and the ranging channels.

When using trend lines in your forex trading, you must remember the following important points:

  • It has to be at least two peaks (tops) or two valleys (bottoms) to draw a correct trend line and either three peaks or bottoms to verify a trend line.
  • It will be less reliable and more likely to break if the trend line you draw is steeper.
  • Trend lines will be stronger the more attempts they are tested, just like the horizontal support and resistance levels.
  • Always draw trend lines according to the ‘price actions’ or market directions otherwise that trend line is not valid.

‘The trend is your friend’ is a term many traders like to use and it is the rule of law. Traders always try to forecast the future direction of the price of a currency by following the trend. However, you should be very careful if you were to place your trade which is against the direction of the trend.

Since trend analysis is based on the past movement of the currency price, it is best fitted under the jurisdiction of technical analysis. Technical analysis observes the historical trends and price changes to decide the future direction of prices while fundamental analysis observes the changes of the currency’s performance.

Although there is a large amount of data involved in the analyzing of the trend, there is still no guarantee that the results will be accurate. In this respect, a trader must know how to apply risk management whenever a trade is executed so as to avoid catastrophic losses.