The trends that are available on a Forex chart can help you analyze what’s happening within a pair. You can use trends to get a better idea of how well particular values are changing over time. This article would provide you with valuable information about trends and various kinds of currencies. In addition there are many chart patterns that can help you get a better idea of what’s going on within your investment.
Why Look at Trends?
Trends are important to see as you can give yourself an easier time with figuring out where a currency pair is going. You can predict the values of a pair over time when you see what trends are going around.
You must also use trends to figure out how intense certain changes might be. This in turn can help you analyze values and get the most out of whatever you are following and using over time.
With all this in mind, let’s take a look at some of the trends that you can use today.
Moving Average
Have you considered how the values of a currency pair might hang around a certain total after a while? A moving average can help you see what is going on within a currency pair.
The moving average takes the average close price of a pair over a few closing periods and will adjust it to create a general look at the value of a pair. You can use this in one of two forms:
- Simple Average
To calculate the simple average:
- Add the last few closing prices.
- Divide them by the number of closing prices that you just calculated.
This is best if you use fewer closing prices so you can get a better idea of the short-term changes that may come about. However, you can always use more closing prices – maybe a month’s worth – to get a better idea of the overall long-term trends going along within the market.
2. Exponential Average
The exponential average entails the individual changes within a pair’s value. The changes are analyzed to see if any spikes might have taken place.
Spikes are weighted down or even removed. This is to ensure that any sudden spikes – times when the value of a pair goes substantially above or below a trend for one or two days – are not going to dramatically influence the average.
In this case:
- The closing prices over time may be calculated but with the days for particular spikes being removed.
- The days when spikes occur may also be weighted down to where two days’ worth of spikes may be consolidated into just one day’s measurement.
This in turn creates a more accurate look at how the value of a currency pair might change. You can use this to get a better idea of what’s happening within a currency pair value. You can certainly use this value to go to your average.
Regardless of what you use to take a closer look at how well the value of a pair is going, you have to see how the rise and fall of a value is going while also analyzing how the changes might take place in accordance with different events and other parameters. This in turn can help you take a closer look at what is happening with your currency pair so you’ll have an easier time understanding what is going on within a currency pair.
Common Types of Chart Patterns
The averages on a chart can be important but there’s a need to take a careful look at everything that is going along within a chart so you’ll have an easier chance with getting the most out of whatever you have. There are many chart patterns that can help you get a better idea of what’s going on within your investment.
- Double Top
The double top occurs when the price appears to reach a peak twice during a brief period of time. This is a possible sign of the value of a pair about to go down.
- Double Bottom
This is the opposite of a double top. The price reaches a valley twice during that same time period.
Head and Shoulders
The head and shoulders pattern will occur when the pair has two identical smaller peaks in between a much higher peak. This is a typical sign of a pair about to decline in its value. The neck line also shows where the valleys appear.
This is a trend that can be easily reversed to show when the value of something may also go up.
- Wedge Pattern
The wedge pattern appears when a wedge shape develops through the bands that show the highs and lows within a currency pair. A rising wedge occurs when the highs and lows start to rise up while the falling wedge is the opposite.
You’ll have to watch out when the bands between the highs and lows start to narrow. This is a sign that the value of a pair is about to change. That is, the trend on the pair may start to change up.
Notice how the bands are prepared through a series of points where the pair’s value goes to the highest or lowest parts. This in turn helps to determine where the trend is going.
This is also known as a pennant pattern for its shape. A tight triangle shape will start to develop within this trend.
- Rectangle Pattern
A rectangle pattern appears when the values of a currency pair are stuck within a rectangle shape. That is, the values are not really changing or going up and down at an increasing rate. The prior decline or rise in a price before the pattern started can be a sign of whether the value of the currency pair will go up or down after a while.
- Triangle Pattern
The triangle pattern has the bands going down or up in a right triangle shape. The peak end will suggest that the price will go in the opposite end as where it was heading into earlier on in the trend.
- Bollinger Bands
Bollinger bands are used to identify when the market will change significantly. These bands are designed to be easy to figure out and can often be calculated through a computer program.
In this case, two separate bands are used to show how volatile a pair might be. These will appear at the top and bottom parts of a chart.
This helps to review the price of a pair and how it can change based on the possible maximum or minimum values of a pair. This is all based on volatility and how often people will trade a particular pair.
Bollinger bands can especially help you identify the highest possible value of a pair before it can end up going down in value once again.
This all helps you figure out the highest or lowest possible value of a pair before it is likely to change in value. It can be a useful predictor for what may occur.
On this chart, the Bollinger bands are at the top and bottom. They are over the average seen in the middle and will show you how the values of a pair are changing and how certain maximums and minimums may be met after a while. It’s a basic look at the potential changes in a pair and what can happen over time.
You must watch for two important parts of Bollinger bands though – the Bollinger bounce and squeeze.
- A Bollinger bounce occurs when the price hits the upper band and then goes back down. It can also be reversed with the lower band when the value goes back up.
- A Bollinger squeeze occurs when the value goes to a band and surpasses it. It can show a potential for the value of a pair to change after a while.
Continuation and Reversal Patterns
This section is devoted to two noteworthy patterns that can be found on a chart – continuation and reversal patterns.
- Continuation Pattern
This is where the price action on a pattern is a pause in an ongoing trend. The price trend will keep on going in the same path it originally went into after this pause ends.
Flags and rectangles can be found in a continuation pattern. That is, a flag or rectangle shape can be made between the upper and lower bands.
- Reversal Pattern
A reversal pattern will show when the price is about to go into an opposite direction from where it originally was. It can be identified through a head and shoulders pattern.
The head shows the peak value of a pair while the shoulders are close to equal to each other but are lower or higher than the head. This is a clear sign that the value of something is about to change.
So, what makes these two options so different from one another?
A reversal pattern focuses on when an entry point on a pair is about to open. It helps you see when it is best to get into a particular position and when you need to get out of it.
Meanwhile, a continuation pattern shows that the current price pattern is going to keep going even after a brief change in its value. It is a sign that the long term trend that was visible early on will still keep on going.
Special Trends Worth Reviewing
There are a few unique trends that you should take a closer look at as well. These are special trends that are made to help you understand how the values of certain currencies might change after a while.
- ABCD
The ABCD trend is where a pair goes up or down in value and goes to the opposite of what happened earlier by a small bit. After this, it goes up or down at the same rate. This can help you out before you choose to buy or sell a pair as you will see how the value of a pair is changing.
The end of such a trend can help you see when it is right for you to buy or sell a pair. This can quickly show you how well different values are changing, thus giving you a better idea of what you are getting yourself into when trading such a currency.
- Three-Drive
The three-drive trend is identical to the ABCD trend but it uses three peaks or valleys instead.
- Gartley
The Gartley trend has changes in the value that appear to make a M or W shape with the first line being the longest.
- Crab
The crab trend is the opposite of the Gartley trend in that the last line is the longest one.
You can use these special trends to identify how the value of a pair can keep on going up or down. This can help you determine an appropriate time for when you want to either buy or sell a pair.
Divergences
Divergences can be reviewed to help you compare the price actions of pairs with the movements of particular indicators. This is an interesting concept that simply entails the highs and lows being made and how intense they are. It is also a point that can be used regardless of the oscillator you are using to try and identify the prices of the pairs you are looking into.
If the price has higher highs then the oscillator should have higher highs to go with it. The same goes with lows. However, if this does not happen then the oscillator and price are diverging from each other. This helps you to identify when trends are becoming weak or if something unusual might occur within a pair.
This entails two different types of divergences:
- A regular divergence occurs when an oscillator makes higher lows while the price of the pair has lower lows.
Regular divergence can be seen in the above picture. Notice how the change in the oscillator suggests that the value of the pair is going to improve over time as the lows are not as strong as they might be. This is a sign of a trend where the value of the investment might improve over time.
- Hidden divergence occurs when the price has a higher low while the oscillator has a lower low.
This is more of a sign of a trend continuing. It gives off the impression that the value of whatever you are getting into is going to go in a different direction from what you might expect.
This example shows when there is bearish hidden divergence.
Divergences can be interesting but you have to be cautious when trading them. You have to look at the gaps between the oscillator and the price to see how they are moving and if there’s a consistency involved in terms of the opposite directions they are going into. This in turn can help you figure out what you are trying to do.
The most important thing to do is see how the trends change in real time or over history. You must do this to see if there is a consistency in the divergences within currency pairs. This in turn will help you review your currencies the right way without being any more complicated than what they have to be.