Forex trend strength refers to the likelihood of an emerging trend to come to fruition, persist, or dictate movements in the foreign exchange market. Traders new and old are aware of the importance of trends, but not many pay attention to the strengths of such trends. To gauge trend strength and make more informed trade decisions that lead to success, it would help to consider the following techniques.
High and Low Monitoring
Many analysts believe that the highs and lows on a chart tell the whole story. The relationship between these high and low points as they form over time can help predict the next trends. This technique is primarily about observing where the extended swing highs and lows are within a given trend.
With high and low monitoring, the key to determining the strength of a trend is finding the signs that a trend is about to start reversing. For example, a chart for a particular period shows a trend of ascension if the highs continue going higher while the lows are not going lower. Generally, this trend is only deemed to be reversing if the highs start dropping along with the lows.
The trend will not always be obvious, but it is not that difficult to spot the points when the highs stop climbing up and the lows start descending. If the trend appears too fuzzy, it helps to compare the highs and lows with a key level that offers a favorable picture. Doing so will make it easier to see the extent of the trend and when it will likely reverse.
Average Directional Index (ADX)
The ADX is a basic tool used in determining when a price is trending strongly. It quantifies trend strength based on a moving average of price range increases in a given period. It is applicable to various traded assets including mutual funds, stocks, and futures. An ADX value in the 0-25 range is described as absent or weak. The 25-50 range is considered strong. Meanwhile, ADX values in the 50-75 and 75-100 brackets are regarded as very strong and extremely strong respectively.
Some forex traders may not pay attention to ADX because it does not exactly indicate when to buy or sell. However, it can actually be used in forex trading especially in MT4, the trading platform used by many online speculative traders like Gainsky, eToro, and Zulutrade.
MT4 features an advanced ADX function that utilizes tweaked auto-smoothing techniques to come up with a graph that is more precise but not as smooth as usual. Together with the MACD indicator, ADX values can be used not only to determine trend strength but also to make a buy or sell decision.
Subsequent Retest Distance Tracking
A retest refers to the reversal of the price direction after a break and returns to the breakout level. In other words, the highs continue going up in an upward trend while the lows keep going down in a downward trend.
Subsequent retest distance tracking means observing the distances between the lows and the reversal points, starting from the subsequent retest instance. If this distance continues to decrease, the conclusion is that the trend is weakening. A trend reversal is already imminent. Hence, the logical reaction is to tweak plans to trade in the direction of the strong trend to reduce risks.
Clustering Price Action
This technique can be considered as a combination of high-low monitoring and retest distance tracking. Its focus is on the point when the market starts to exert constant pressure on a key level over a short duration.
To determine trend strength through clustering price action, it’s crucial to watch out for market responses to support or resistance within a given period, which may be a few days to an entire week. If the market starts to group together for an extended time at a key level, it can be said that the trend is already disintegrating, headed for a reversal.
Gainsky Investment is a forex shared trading platform that offers different asset trading such as forex and cryptocurrency. Determining the strength of a trend is crucial in forex trading as it subjects probabilities into more discernible success-loss probabilities. By trading with a strong trend, the chances of yielding a profit increase. It becomes easier to make a decision as compared to viewing graphs and data with a much broader perspective. Gainsky can help to provide a solution if you are facing any problem.