If you have been around Forex trading for any amount of time at all you are probably familiar with the saying, “The trend is your friend”. Why is that? Simple, because Forex currency pairs can move in one general direction for an extended period of time. This is great news for traders as there is tremendous profit potential in each and every large trend.
One of the questions that newbies frequently ask is, “How can I determine the direction of the trend?”. That is a great question and sometimes it is so simple because often times the answer is right in front of us. One of the simplest ways to determine a trend is to look at a Forex price chart. Now, ask yourself this simple question, “What is the general direction of the prices?” If the prices move from the lower left-hand section of the chart toward the upper right-hand section of the currency pair’s trend is “up”. If the price moves from the upper left-hand section of the chart toward the lower right-hand section of the chart the currency pair’s trend is “down”.
If identifying the trend is as simple as we have illustrated above why would we ever need a trend indicator? The most obvious reason is that there may be times when the trend is not so obvious. The up and down trend we spoke of in our example was a trend that had already developed. As traders, we would like to get in on a trend and ride it as it develops and gains momentum. A trend indicator can help us to get in on a developing trend in order to profit from its subsequent increasing momentum.
The most well-known trend indicator is the moving average. A properly used moving average can help you to enter a trade as well as keep you in a trade as long as the prevailing trend is in place. A moving average moves as the currency pair’s price moves. When the currency pair’s prices increase the value of the moving average increases as well and when the currency pair’s price decreases the value of the moving average decreases. The moving average trend indicator essentially smooths the price action by averaging the last “X” number of the currency pair’s closing prices. For instance, a simple 50-day moving average is the average of the last 50 days of closing prices for a currency pair.
The moving average is but one of many different types of Forex trend indicators that are available to you. Remember that they are not just useful in getting you in a trade, but in keeping you in a trade in the direction of the prevailing trend. We have all heard the saying, “Let your profits run”. That is exactly what a properly used trend indicator can do for you.
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