Trend analysis can be one of the most difficult tasks a trader must face. Analysis can become convoluted due to a variety of different charts, time frames and technical indicators. The easiest way to find direction is to take a quick walk down your chart and start marking off highs and lows. We can establish an uptrend by finding price print higher highs along with higher lows. The traits of a downtrend are exactly the opposite. Downtrends will specifically look for price action to print lower lows and form lower swing highs as price progresses downwards.
Let’s look at an example. Below we have a 30minute chart on the EURJPY currency pair. Our trend analysis should begin at the far left of our graph by marking the highest high. My recommendation is to incorporate at minimum of six trading days’ worth of price bars on your chart. Today’s analysis pinpoints the April 25th high located at 107.67. From this point, the EURJPY moved 220 pips lower to 105.47 creating a new swing low on April 30th. From this point, the chart has continued to print lower highs and lower lows all the way through today’s price action. This is indicating price is in a downtrend.
Now that we have an idea of where the trend is going, we can also use our analysis to gauge market momentum. For this, I recommend blocking off our graphs into three day trading periods. This can be done by using the verticle line function inside of marketscope 2.0 . Then proceed to block your graph by drawing lines denoting Monday and Wednesdays. You can find this process outlined below on our EURJPY graph.
Strong momentum can be judged if we have the last two blocks coming to the same conclusion regarding the trend. The blocks denoted in green both conclusively show lower highs and lower lows during their respective periods. With this in mind, as a trader, I will have a stong bias to sell.This process will continue into next week as well. At the start of trading on Monday, I will draw a new verticle line on my graph denoting the weakness of the EURJPY from Wednesday the 2nd through Monday the 7th.
Using the analysis above, my preference is to continue to find opportunities to sell the EURJPY on retracements and breakouts. This is preference is in tune with our trend and will continue to be the basis for our trading unless price prints a higher high. Primary price targets for this pair reside at 104.16 as discussed in the April 11th edition of Chart Of The Day.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
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