No market trends like the forex trading market, and simply riding a trend can be the quickest path to profits. Unfortunately, inexperienced traders are too often content to glance at a chart, note that the currency pair is higher on the right side than the left, and assume that means the pair has embarked upon an upward trend. Sometimes that glance is sufficient; however, the situation can be more complicated than it originally appears. Here are a few tips toward analysing the trend.

1) Look at the long-term charts. The daily and weekly charts offer forex traders the best view of a currency pair in context, and sometimes only with such a view does it become clear whether the recent slant upwards in price is the beginning of a new trend or merely the next up-run within a range. If on the daily chart, the price remains higher on the right than the left, then the trend has more credibility than if the same situation existed on hourly or thirty-minute charts.

2) Check the indicators. There are several which help forex traders determine if a currency pair is trending, as opposed to consolidating or trading within a range. One is the average directional index (ADX), created by the legendary trader J. Welles Wilder. The ADX is a measurement of the strength of a trend, on most trading platforms displayed as a line graph in an indicator window beneath the chart itself, with readings above 35 indicating a strong trending bias. Note that the ADX does not differentiate between a bearish or bullish bias, as it is presumed the forex trader can determine which way is up.

Another commonly utilized indicator is a series of moving averages over 10, 20, and 50 time periods (truly conservative traders throw in the 200-period MA, as well). If the moving averages line up in order from lowest to highest, top to bottom, then chances are good the uptrend has “legs” and will continue to climb; the opposite, of course, holds for downtrends.

Below is an illustration of these two indicators in action. The yellow line nearest the heikin ashi price bars is the MA-10, the blue line is the MA-20, the green is MA-50, and the grey is MA-200. This is the four-hour chart of USD/MXN not long ago in a clear uptrend:

If the ADX reading had continued pushing above the 35 level (the horizontal dotted line in the middle of the indicator window) then a trend with such strength would have been an ideal market to buy on dips and ride the price higher with a trailing stop to lock in profits. However, note how the main line of the ADX (light green at the bottom of the chart) indicates the uptrend is weakening even as the price rises to successively higher highs. This bearish divergence became reality a few candles later as another round in the subprime mortgage crisis slammed the forex trading market, breaking most currency pairs’ trends and sending the greater percentage of them into sideways motion.

The trend is your friend, until it hits your trailing stop and ends.