But understanding exactly what a trend is, and how and why trnds form, is something that a lot of traders don’t have a firm grasp on.
Trends have a specific anatomy, which can be thought of as either a set of inherent rules that they follow, or as a body that builds upon itself over the lifespan of the trend.
Whatever visual works for you, there are steps that make up a trend, and understanding those steps can help traders get a better understanding of how to analyze trends.
The first part of a trend is imbalance. It occurs when a set of orders, that is greater than the orders currently driving trends, comes into the market. For example, let’s say that EUR/USD is currently in a downward trend.
Step One: Demand
The first part of a trend is imbalance. It occurs when a set of orders, that is greater than the orders currently driving trends, comes into the market. For example, let’s say that EUR/USD is currently in a downward trend.
This means that right now, the market is defined by more sell orders than buy orders. If traders were to begin buying at higher rates than those selling, a new up trend is begun.
It doesn’t matter what time frame this occurs, or how often it occurs in a single day or week; every time a new trend happens, it is led by this initial phase of imbalance in demand.
The moment that a new trend has begun, automated stop bids start kicking in. Traders start closing or opening trades based on the new information that is coming in.
It doesn’t matter what time frame this occurs, or how often it occurs in a single day or week; every time a new trend happens, it is led by this initial phase of imbalance in demand.
Step Two: Cause and Effect
The moment that a new trend has begun, automated stop bids start kicking in. Traders start closing or opening trades based on the new information that is coming in.
As these traders react to the changes in the market, they propel the decline or rise in price even further by adding more buy or sell orders to the market.
This step is the hardest to predict, because it depends on how many traders had open trades that were relying on previous trends. It could take quite a while for the liquidation step to complete, or it could be done very quickly.
At this step, the forex trading market has now collectively noticed and catalogued the trend, and is honing in to begin trading on the new information.
This step is the hardest to predict, because it depends on how many traders had open trades that were relying on previous trends. It could take quite a while for the liquidation step to complete, or it could be done very quickly.
Step Three: Honing In
At this step, the forex trading market has now collectively noticed and catalogued the trend, and is honing in to begin trading on the new information.
Buy or sell orders are placed based on the new trend, and that continues to drive the trend in its current direction. This step lasts as long as it takes for a new trend to begin. As soon as the demand is imbalanced again, a new trend will retire this one, and traders begin anew.
As you can see, understanding the anatomy of forex trading trends isn’t as hard as it sounds, but it is vital information.
Using This Knowledge
As you can see, understanding the anatomy of forex trading trends isn’t as hard as it sounds, but it is vital information.
While you can’t always predict how long a trend will last, you may be able to use your understanding of how trends work to anticipate a good entry or exit time. If step three has been reached, it may be time to stand back and start watching for the next trend, which could be just around the forex trading corner.
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For more information:
https://twitter.com/THEVINCICM
https://www.linkedin.com/company/vincicm
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