Forex Market Trends – The Holy Grail Of Trading?

Do forex market trends even exist? Market trends that can easily be picked up and be used to make a large amount of money over a short period of time? Day traders will no doubt say there is no such thing – the market is 100% unpredictable over any period longer than one day. Swing traders and long term traders will disagree.

Fact is, when you do day trading you make or lose money in the course of one day. If there is any question of a “trend”, then it would be a trend that perhaps lasts a few hours. You have to make quick decisions, move in and out of markets in a split second. If you take into account trading commissions, this market is best left to experts. Strangely enough, the excitement of day trading often appeals to beginners, who proceed to lose their fortunes very quickly.

Swing traders follow so-called “swings” in the market. Medium term movements that seem to form some sort of pattern…. Moving up for a few weeks, sometimes stabilizing at a certain level for a while, and then moving down again. It sounds easy enough to follow the trend in this type of market. The problem is, any unexpected economic news might cause the swing to turn around and move in the opposite direction very quickly.

Day traders rely heavily on what is called “technical indicators” to help them make trading decisions. Most of them have sophisticated charting software to visually represent market movements. The simplest technical indicator is probably the moving average. If you draw a basic chart, showing when the price of the currency moves above or below the moving average, it can be used as a trading signal to buy or sell that currency. ‘Trending indicators’ is another group of indicators that are highly popular. Many traders swear you can in the first place pick up a trend in the market with one of these, and also predict when the trend will run out of steam.

The day trading industry has spawned a whole set of ‘technical indicators’, mathematical formulas trying to predict the next movement of the market. The underlying reasoning behind all technical indicators is that the future will in some or other form be determined by the past. This is also the biggest inherent weakness of any technical indicator. The moving average, for example, is used by many traders as a signal to buy or sell. The argument is that if the price of a currency for the car moves above the moving average for a certain period, it will continue to climb for some time. The trend will continue. Trending indicators, who actually try to identify a trend in the market, are more sophisticated tools, but even here the future is extrapolated by looking at the past.

Another type of analysis, used more by swing traders and long term traders is called fundamental analysis. In fundamental analysis one would try to identify ‘fundamental’ economic factors that will have an effect on the future price movements of a particular currency. One such example is the effect interest rates have on the value of a currency. If the interest rate goes up, it will have an effect on the value of that country’s currency which could not be predicted by looking at technical indicators alone.

Chart used by traders vary from the simple line chart, to candlesticks and bar charts. A line chart is basically just a line connecting today’s closing price with that of the previous day and so forth. Bar charts show both the opening price and the closing price. The hugely popular candlestick charts display a lot more information: highest prices, lowest prices, as well as opening and closing prices.

Forex market trends is the subject of many debates, numerous studies, and a lot of conjecture.

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