The most challenging question to answer in forex trading is whether a trend exists or what seems to be a trend is, in fact, a sideways-trading range. In particular, new traders experience difficulty telling where and when a trend starts and where and when it will end. However, success in forex trading depends on your uncanny ability to identify a trend and entry and exit points.
A trend occurs when prices in forex move in a particular direction over a long or short period. Trends can move upwards, downwards, or even sideways. To accurately identify a trend, you need to know and understand the stages of a forex trend and how it affects you as an investor. This article examines the four stages of trend trading in forex that you should be aware of.
1st Stage: Accumulation Phase
The accumulation phase is also known as the consolidation phase. In this stage, prices tend to move in a particular range after falling for six or more months. During this phase, the price remains concentrated in a range with bulls and bears at equilibrium and can last for weeks or months.
During this stage, traders often use the 200-Day moving average to identify long-term trends. However, it often flattens out. So instead of focusing on trend trading at this stage, It would be wise to focus on trading the range.
It is also recommended to enter a short position at the top of the range or a long position on a price by bouncing off the support level at the channel’s lower end. Avoid trading in the middle of the range at this phase because it is often a poor trade location.
2nd Stage: Advancing Stage
At this stage, the price breaks out of the range in an upward or downward direction. In case the trend goes upwards, the price will form both higher highs and lows. This gives you a chance to enter into a long position on pullbacks to the moving average. When the upward trend is strong, the up days tend to be more than the down days, and the price will be above long-term moving averages like 200-SMA.
When the trend goes downwards, the price lowers below the long-term moving averages, such as the 200 days moving average. In such instances, the days when the price is trending downwards are more than when it’s trending upwards.
When the price moves back to the moving average, you can enter short positions because it is likely that the price will continue trending lower. The best trading strategy during the advancing phase is to enter short or long trading positions according to the direction of the trend every time the price pulls back to the moving average.
3rd Stage: Distribution Phase
This stage occurs when the price trend tends to move in a given direction for some time, such as six or more months. The distribution phase lasts for some time. At times, it appears like a long consolidation period. The price is often consolidated in a range as the long-term moving average flattens out.
As an intelligent trader, you should trade the range during this stage. You can enter long-term trading at the lows of the range and short-term trading at the highs of the range.
4th Stage: Trend Reversal
At this stage, the price often resumes its long-term trend. It can also reverse. For example, if the price was moving in an upward trend before it started trending in a range, it’s often expected to assume the upward trend and continue going even higher after some time. However, if the movement has run its course, it’s possible for the price to reverse in the opposite direction.
Therefore, you must watch the price trend during the distribution stage because the price can break out either in the upward trend direction or reverse and in the opposite direction. The best strategy to adopt at this stage is to profit from the emergence of a new trend in the opposite direction or on the long-term underlying trend.
Understanding how trends move at every stage is the key to success in forex trade. Be an intelligent trader by using technical analysis, listening to market sentiments, and being alert about when a trend gets exhausted or when a reversal occurs to make a profit.