The Forex, or foreign exchange, market affords opportunities for both day traders and long-term investors to generate consistent returns. Day traders look for short-term trends to inform multiple trading decisions throughout each day. Long-term traders look for trends spanning several days, weeks, months or even years to take advantage of larger movements driven by fundamental economic factors such as interest rates. Knowing how to determine both day-trading trends and long-term trends in the Forex market is important for any Forex trader, no matter your preferred trading time frame.
Multiple Time Frame Analysis
Forex price trends form in fractal patterns, meaning that the same patterns you can see on a daily or weekly chart can also be found on a one-minute chart or any time frame in between. Because of this, traders can use the same indicators or strategies to identify trends on any time frame they wish. To determine a day-trading trend, for example, you might apply an exponential moving average to a one- or five-minute chart; then you could apply that same moving average to a daily or weekly chart. Moving average indicators change based on the information in each chart, revealing individual trends for any time frame used.
Multiple Moving Averages
Using multiple moving averages on a short-term chart can allow you to identify short- and long-term trends within a single chart rather than switching time frames. To identify a long-term trend on a short-term chart, simply add a second -- and possibly third -- moving average to the chart, using a greater number of periods for the calculation. If you use a 60-period moving average on a 15-minute chart, for example, you might add a 200-period moving average to reveal the longer-term trend. The result of the 200-period moving average on the 15-minute chart would be similar to that of a 60-period moving average on a one-hour chart, and this concept can be applied across any time frame.
Comparing day-trading trends against long-term trends can reveal opportunities to increase your probability of making successful trades. One such opportunity arises when long-term and short-term trends are in alignment, meaning they are both moving in the same direction. When this happens, placing a short-term day trade in the direction of the trend can hold a greater probability of success, while trading in the opposite direction can decrease the probability. Remember that "the trend is your friend," and keep an eye open for trend alignment.
Relative Trend Strength
Understand the correlation between and relative strength of short- and long-term Forex trends. Short-term trends can consolidate, reverse and continue multiple times within a long-term trend, but the long-term trend will always exert more influence over price than short-term swings. If a particular currency pair is in a downtrend on a five-minute chart but in an uptrend on a daily chart, the upward momentum of the daily trend is likely to overpower the current downturn on the lower time frame. When you try to determine a day-trading trend, always take the long-term trend into consideration to gain insight into future price movements.
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