4 Signs of Trend Changes in Forex Trading
It’s important to have friends. He can strengthen you when you are weak, support you to live your life, and remind you when you make a mistake. In the world of trading, your friend is a trend. The term “the trend is your friend” is a postulate in forex trading. Trend is a representation of market power. You cannot fight the market. If you are not friendly with trends, that means you announce hostility to the market. This is dangerous!
Because you can’t fight the market, the only way is to follow where the market moves. “If you can’t beat them, join them,” said the Englishman. Following the flow of the market is like swimming in a swift river. Flowing expertise will safely get you across the river.
But unlike river currents that always move in one direction, the market has its own dynamics. Sometimes prices move up, sometimes down. The movements are often extreme. The question that then arises is: “How can I recognize the potential changes in market direction?”
Yes, you must be able to recognize the potential changes in market direction so as not to feel “cheated”. It could be a time when you think the price will continue to rise, but it turns out that the direction turns to go down. Or, you think the market will turn around soon, but it still continues the previous direction.
For that, here are some tips you need to know.
You certainly know “trendline” right? Not yet? Wow
Trendline is a tool that is very commonly used as a technical analysis tool in forex trading . Besides functioning as a support (in an uptrend) and resistance (in a downtrend), the trendline is one of the simplest tools to be able to recognize trends. Mistakes in recognizing trends are the beginning of your failure to gain profits in trading. The requirement to draw a valid trendline line is that there are at least two peaks or valleys that can be connected.
A break of the trendline can be an early indication that the price has the potential to change the direction of the trend. Trendline is considered translucent if all body candlesticks are formed outside the trendline line.
Must Know # 2: Non-Failure Swing Scenario
In the book “Technical Analysis of the Financial Markets” by John J. Murphy, it is stated that there are two conditions that can provide clues to the end of a trend. Both conditions are non – failure swing conditions and failure swing .
The condition of non-failure swing is a price movement that directly penetrates the last top or bottom point, after reaching the point farthest from the trend. The illustration is something like this:
We start from the left picture first. The picture shows a change in the direction of the trend from rising to descending. The confirmation is when the price breaks the last bottom (A) and forms a lower bottom (C).After that, the market forms another peak (D) which is not higher than the previous peak (B), then then drops and breaks the support (C) and moves towards point E.
What about the right picture? The picture is the process of reversing from falling to rising. The confirmation is when the price successfully penetrates the last peak (A) and forms a higher peak (C). After that, the market forms a valley again (D) which is not higher than the previous peak (B), then then rises and breaks the resistance (C) and moves towards point E.
In contrast to non-failure swing, this failure-swing scenario does not have “pull-back”. To make it easier to explain, it’s a good idea to see the following picture:
So, after breaking point C, the price moves directly towards E, without any correction or pull-back again. But note that point D when the uptrend is never higher than point B. Instead point D at the time of downtrend is never lower than point B.
Must Know # 4: Get to know the Reversal Pattern
“History always repeats”. That is one of the basic principles of technical analysis. The repetition in question is in the form of price movement patterns. By studying the pattern of price movements in the past, we can estimate where the next market will go, if the same pattern reappears.
To recognize a reversal, you can also use a pattern called reversal pattern. “ Reversal” itself means “reversal”, then “reversal pattern” means approximately “reversal pattern (direction)”.
There are several patterns that can indicate that the trend is over and has the potential to reverse direction, namely double top, double bottom, triple top, triple bottom, head and shoulders and inverse head and shoulders.
So, the conclusion?
Although you must be able to follow the trend and use it to make transactions in forex trading , you must know when you are out of the market. Recognizing potential trend reversals is something that you absolutely need to know in order to immediately secure the profits that you have earned, or immediately dispose of a losing transaction so as not to be dragged further.