In today forex faq, we have a question from one of our fellow traders asking me about the way to predict the strength and trend of a currency pair.
Below is the question:
How do you predict a currency pair is going up or down on a certain time frame and the strength is good for trading?
Telling the trend and strength of a currency pair is very important for a trader as you do not want to trade against a strong trend. There are several ways you can predict the strength and direction of the trend but let me show you one effective way of doing it so that you can try it out yourself.
Indicators Required: Exponential Moving Averages (EMA)
In this method, you will have to plot 3 different settings of EMA. You will need to plot the 100, 200 and 400 EMAs on the same time frame that you want to identify the trend.
For example, I want to check the trend of the EURUSD at the hourly chart. I will then plot these 3 EMAs on the hourly chart.
How to Tell the Trend and Strength of the Market
If the EMAs are stacked one after the other in a downward manner, you are in a downtrend.
If the EMAs are stacked one after the other in an upward manner, you are in an uptrend.
If there are clustered together, you are not in a trend.
As for the strength of the trend, you can tell from the angle and separation of these EMAs.
If the EMAs are stacked one after the other with good angle and separation, you are in a strong trend.
In fact, I have recorded a video to help you better understand this techniques so that you can try them out on your trading platform. Hopefully you can use this technique to enhance your trading strategy.
Alternatively, you can take a look at this trend identifying software that I am using.