How to Figure Direction in the FOREX Market

by Eric Bank ; Updated July 27, 2017
Price charts can reveal long- and short-term trends in the FOREX market.

Knowing the market direction, or trend, for a FOREX currency pair is essential to trading success. You can identify trends by using simple moving averages (SMAs). An SMA is the average of prices over a specific time period; the oldest price is removed from the average as the newest one is added. By exploiting the variable time-period charting capabilities of most online FOREX analysis platforms, you can construct SMA trend lines that will reveal market direction.

Step 1

Determine the long-term trend. Plot a 13-week SMA line onto a weekly price chart for your currency pair. If current prices are above the SMA line, you are in a long-term uptrend. The reverse is true if current prices are below the SMA line.

Step 2

Determine the intermediate-term trend. Plot a 13-period SMA onto a four-hour price chart and compare the result with the one obtained for the long-term trend. If they agree and if the trend line on the four-hour chart makes an angle of 20 degrees or more with respect to current price line, then the intermediate trend direction is confirmed and may hold long enough for you to place a profitable trade.

Step 3

Determine the short-term trend. Plot an SMA of the last 55 hourly mean prices--the average of each hour’s high and low prices--for your currency pair onto a one-hour price chart. When the one-hour SMA moves into agreement with your other two SMAs, you have identified the possible start of a short-term trend and a trading opportunity.

Tips

  • You can combine the SMA technique with a simple price trend line indicator: if the current price line is ascending and has a higher high and a higher low than the previous ascending trend line, you have a well-defined uptrend. The reverse analysis applies to downtrends. You can increase your successful trade ratio by limiting your trades to situations where your SMA and trend line indicators agree. Over time, you will develop a feel for the strength of the trends discovered through your indicators, allowing you to adjust your trading strategy and temper your enthusiasm with a realistic understanding of the risks inherent in FOREX trading.

    Consider experimenting with more sophisticated moving averages, such as the weighted or exponential forms. You can also test other time periods and number of periods in your averages.

Warnings

  • Trends can and do change quickly. Always protect your trades with stop-loss orders--instructions to liquidate your position if prices move against you by a specified amount. A take-profit order, in which you close out your position after a specified gain, locks in your gains before a trend reverses. In the long run, successful traders don’t fight the current trends and cut their losses quickly.

    Always test your strategies by first placing hypothetical trades.

About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

Photo Credits

  • Kick Images/Photodisc/Getty Images