A forex currency can generally be regarded as either being in a trending phase or in a sideways consolidating phase. Normally this should be easy to tell but sometimes an online Forex trader needs some help seeing these phases quickly and easily. What makes this even more complex is that a currency can easily be trending in one time frame (daily) and be trading sideways in another (four hour).
Most forex traders have a favourite trading technique which works very well in either a sideways or a trending market. It is seldom the case where techniques work in both. It is therefore important for a trader to regularly do an evaluation of whether the market is trending or trading sideways.
A technique often used by experienced traders is applying multiple moving averages on the same chart. Normally seven to eight moving averages will do. They can be given different colours to make them more visually pleasing and identifiable. One combination of settings that is very popular is setting the first moving average on a period of three and then increase the period for the next moving average by 3. This will give you moving averages of three, six, nine and so on. These can be simple and based on the close of the price. You can vary these settings as you like as long as you apply your final combination consistently on all your forex charts.
Once you have them setup, the next step is the blank the screen so that you only see the moving averages and nothing else. Forex trading candlesticks can be distracting in the background. The easiest is to set your charts to a line format and then to colour your line format the same colour as your chart background. So if your chart is white, then colour your line charts white. You should now have a chart showing only the coloured moving averages for the time frame which you used for the setup.
Now we are ready to evaluate the phase of the market which should be the easy part. If all the moving averages are pointing up or all are pointing down this means that the market is trending. If they are moving further and further apart, the market is trending very strongly. If they are all pointing in the same direction and starting to trade closer together, it means that the strength of the trend is decreasing. This should all be very easy to identify.
If the moving averages start crossing over each other, it means that the market is starting to consolidate and trade sideways or could even reverse. During this phase it can be assumed that the market is trading sideways until all moving averages start pointing in the same direction again.
There is a special time when the moving averages start consolidating so much that they trade very close to each other and start forming a knot or single colour. These conditions mean that all the traders in the market are agreeing on the present price of the currency. It will then only take a small introduction of news into the Forex Market to break this situation and create a volatile breakout price movement.
This technique can be used for any time frame. From the one minute chart – to the monthly charts. I hope you start using this trading concept and technique to your advantage the next time you trade.