Written by Robert McKinley

Trends in Forex Trading

What is a trend in Forex?

A Forex trend is simply the direction in which a currency pair is moving.

• Typically, the movement of currency prices is not directly up or down.
• More often than not, the movement is up or down and then some retracement before the currency continues once again to move in the direction of the original trend.
• “Retracement” is the contrary (opposite) movement of a currency from its original trend direction. In other words, the price may move up or down for a period of time and then it will reverse itself and go in the opposite direction, usually for a shorter period of time. This behavior is also sometimes called “correction” or “pullback” in addition to “retracement”
• Trends are differentiated by their direction and their duration.

Types of currency (or Forex) trends

• Uptrend: The currency price is trending upward in a series of thrusts during which the price reaches a higher level than it did in the higher thrust.
• Downtrend: It has the same behavior as an uptrend but in the opposite (downward) direction.
• Sideways: Currencies do not always trend up or down; At times, price thrusts and reactions are not aggressive enough to move the price very much in either direction. When this occurs, price remains close to its original position.

Below, you can see the thrusts and reactions in uptrends and downtrends.

Forex Trend Groups

Forex trend groups are differentiated according to the duration of the trends.

1. Major Forex trends can last from one to three years and can be followed best using daily charts. They are formed by a series of intermediate trends.
2. Intermediate Forex trends have a lifetime of three weeks to three months and can be followed best on hourly charts. They are formed by a series of minor trends.
3. Minor Forex trends complete their run in less than three weeks and can be followed best with 15 minute charts.

Most major currency-market trends are closely associated with the interest rate differential between the two currencies of a currency pair. A good example of this is when interest rates in the United States have been rising while interest rates in the European Union have been stable and we see a sustained major downward trend in the EUR/USD pair.

Here is what happens:

• Investors sell Euros that they borrow or buy in Europe with U.S. dollars at a lower interest rate.
• They can then re-lend or sell the Euros at a higher long-term interest rate in the U.S.
• It is the intensive selling of the pair that drives the price down and creates the downtrend.
• Of course, the reverse happens when U.S. interest rates remain stable and European interest rates remain high during the same time period. In this case, a major uptrend can develop.
• When a significant difference between the interest rates of the two currencies narrows enough, any major trend that may have developed will end.

For now, remember that as a general rule, if there is a significant difference in interest rates between the currencies in a pair, there is a good chance that a major trend will develop, either up or down, depending on which interest rate is rising and which remains relatively unchanged.

Forex traders use fundamental analysis to monitor and consider the various macro-economic elements that affect a nation’s economic health – including interest rates.

The next lesson is Trend Lines.