The best way to trade on the forex market is to spot foreign exchange rate trends and then ride them to profits. However, spotting trends is where most traders have problems because it requires a certain level of experience in the market and has to be based on solid number based reasons.
Most inexperienced forex traders have trouble with the concept of spotting foreign exchange rate trends even if they try to follow their strategies perfectly. This happens because these new traders do not know what a trend looks like or how it typically behaves in the market. For such traders, here is a small primer on the four stages that most trends follow.
The first phase of a foreign exchange rate trend is fairly simple. This is the stage where not a lot is happening with the forex rates. In this stage, the forex prices will oscillate between a steady range which is good for range traders but not for trend traders because it creates uncertainty about potential opportunities.
In this stage, you as a trader must remain vigilant for what is known as a breakout. The breakout is when forex rates suddenly break through the support or resistance levels which they have been keeping to for a long time.
It is important to note that breakouts are almost always related to the time period that the market has been in consolidation. The longer the consolidation period, the more explosive the breakouts tend to be. This is the phase where you will decide whether the breakout is true or false.
After the breakout, the foreign exchange rate trends will drop back for a bit. This retracement has to be above the breakout point and should result in a further turnaround if the breakout was real and not a false start. This is the ideal situation for you to place your trade in the market.
This is the phase where most profits should be made. Herein, the foreign exchange rate movements will continue their trend. This is also the stage where most of the trend will take place.
You have to be very careful about the end of this stage because when this stage ends the forex rates will start to reverse their trend. This reversal is usually visible in the form of a particularly strong spike, a plateau, or a double top formation.
The rates will drop from this peak and rally once more but if they do not cross this peak again then you know that the trend is reversing. If the trend, instead of crossing the peak, drops back below the previous trough that it had touched then this is the point when the trend can be considered to have ended.
The fourth phase is where the trend is dying and the foreign exchange rate movements are dropping consistently. This is also the place where you can short the currency to gain even more profits. In order to benefit here, you will have to use Fibonacci techniques.