Some of them enjoy these periods since they base trading strategies on them. Other traders get scared and hold back for a lull and stagnation. The only thing which is certain, however, is that Forex trends can cause enormous losses if they aren’t recognized on time. Moreover, they can bring in extra profit for traders that play on time and determine correctly the future trend direction on the Forex market.
The definition of a Forex trend
If we contemplate the concept of a Forex trend in a narrow sense, it represents a price movement from one point to another without a significant consolidation or pullbacks taking place during the movement. Any big consolidation or reversal is taken into account as the end of the current price movement. When it comes to price micro-vibrations, they aren’t considered in the overall equation. In other words, a trend is an orderly price movement from point A to point B, where the later point is the moment of the reversal or the end of a trend.
The first phase – an imbalance occurs
The first phase is a key signal, a major factor – a sort of a bell to which competent and experienced traders react in an efficient manner while inexperienced ones slowly start to lose cash. This phase is formed due to the occurrence of a huge volume of same type orders, the number of which is remarkably higher than the number of preexisting orders. This phenomenon is the exact cause of the birth of a trend.
Novice traders who don’t want to lose money can always employ copy trading at trading firms like Everforex. Copy trading, as the name suggests, enables inexperienced traders to directly copy the positions taken by more experienced ones and connect a part of their portfolio with theirs. When a trader links their profile to another trader, they copy all of their existing positions on the market, and any action they take henceforth.
Example of a first phase
If the USD/EUR pair is trending upwards, this stands that the overall number of orders to purchase is larger than the number of sell orders. For a market to be able to reverse and begin moving downwards, traders will need to create a volume of sell orders that will surpass the volume of current purchase orders, which are currently moving the market upwards.
If a situation occurs where a market contains a sufficient number of sell orders to cover the demand of all purchasers, the market will no longer move upwards and will begin to slowly move in the downward direction, as sell order volume rises.
The second phase – liquidation ensues
Liquidation represents an instance where a trader closes a losing trade. Generally, this doesn’t occur until a market reaches its stop loss level, however, in a lot of cases, traders close their trades manually because of the market and other types of conditions. This phase is a consequence of the imbalance that happened in the previous phase.
The market movement that is a result of market imbalance during the first phase forces traders that had open positions directed against the existing development of imbalance to close their trades in order to breakeven or minimize potential loses.
Experienced traders don’t wait for such a development of events and close their positions manually. Accordingly, other traders may be able to find closure in a breakeven point as their maximum, while the least experienced ones will instantly start losing cash if a stop loss is too low.
The last phase – realization
This phase is the end result of the market behavior in the two previous phases. At this moment, all traders are aware of the direction of the trend and its actual existence, and start to develop their trades on the basis of new knowledge.
This often is determined by the trading system – someone stops orders while waiting for a better period, while someone is willing to work with the trend. Precisely at this moment, a reverse reaction may happen since the balance tends to recover. Hence, trading while abiding by the trend also has its flaws.
Trends are necessary for traders to be able to earn profits in the Forex markets. Without one, gaining cash wouldn’t be possible which is why accurate comprehension of how trends develop in the market is essential in the capability to not only make cash but to time trade exits and entries.