3 Stages of Forex Trend Formation

Simply put, a trend is a tendency for prices to change in a certain direction over a given period of time. It’s an important concept for anyone who decides to trade with forex to understand. In fact, how successful your forex trade efforts will depend heavily on your ability to identify trends. It’s critical to be able to determine and target profitable entry and exit points. If you want to know how to do this, understanding trends better is a must. That said, here are three important stages of forex trend formation you should be aware of.

Stage number one – The imbalance

The first stage of forex trend formation is maybe the most important one. It’s that point in time when you, as a forex trader, are supposed to react. For experienced traders, this first stage serves as a bell at which a move is supposed to be made. Similarly, for inexperienced traders, this is when they start to lose money. It’s the trader’s reaction that determines whether and how much money are they going to win or lose. Basically, this is the point when the number of buy orders starts surpassing sell orders. Or vice versa. Let’s say that EUR/USD is in an uptrend. What this means is that there are more buy orders coming into the market. With the traders who place buy trades making the market to advance higher, it would be necessary for other traders to place bigger sell trades. That would allow the market to move lower. When buy orders consume all the sell orders, the market becomes unable to move higher. No matter when the trend is forming, the imbalance stage marks its beginning.

Stage number two – Liquidation

The second stage of forex trend formation is known as liquidation. What happens in this phase is that a trader closes out a losing trade. Most of the time, this occurs when the market reaches its stop loss level. You can look at the liquidation stage as a direct result of the imbalance that appeared in stage one. The way the entire market moves after a market imbalance has been formed also makes some traders close their trades. This allows them to make sure they don't lose money and in some cases break even. However, what this means for the market is that even more sell bids are being placed. The market then starts moving downward even faster than it already did. It's also important to mention that the most important factor in this stage is the number of traders who had their orders directed against the current state of the market. The more of them there are, the faster will market move downward. At this point, it’s really important to turn to a broker such as Ever Forex and get ready for making moves.

Stage number three – Acceptance

By the time stage two ends, traders become fully aware of the current state of the market. They are able to identify the trend that just formed and decide on their next according to the direction the market is heading into. However, not every trader opts for the same move in this stage of forex trend formation. For example, there are always traders who decide they want to work with a trend. They base their next few moves according to the trend, hoping to make a profit. Also, there are those who just freeze their orders and wait for the situation the change. As a result of a number of different moves, the balance starts recovering. What this means for traders is that trading with the trend isn’t necessarily always the best idea. If the market recovers quickly and you’ve traded with the trend, you’ll find yourself in the same situation once again.

Quick recap

It can’t be stressed enough how important understanding each of these three stages is for anyone wishing to trade with forex. Stage one happens when one set of orders which are larger than those in the current trend enter the market. The next two stages include the wrong side of market closing their trends in order to save money and traders making their moves which eventually results in the market restoring its balance.

Conclusion

If you want to trade with forex, being ready to react to sudden changes in the market and make impulsive decisions is a must. Of course, this also means you need to know your way around the market and completely understand how it works. Trends play an essential role for traders and without them, obtaining profit would simply be impossible. That’s why it can’t be stressed enough how important it is to understand each of these three stages. This is exactly why inexperienced traders are usually better off getting underway by using a simulator until they’re sure they can be competitive in the real market.