Learn to Identify Market Trends

Learn about candlestick charts, analyzing trends, and how to detect the direction of price movements.

Identifying Market Trends with Candlestick Charts

In order to analyze the Forex market, it is important to understand the structure of candlestick charts. The basic building block of a candlestick chart is a candle. Understanding how to read a candle is essential to identify whether an asset follows a specific trend.

A candle may either rise or fall. The green candle in item 1 indicates that prices are rising while the red candle indicates the opposite. It is important to distinguish between the main body of a candle and the lines that extend from it.

In the below example, the opening value of the red candle is 2.95 while the closing value is 2.25. The values at the very top and very bottom of the candle (3.00 and 2.00) represent the range of price values that the asset in question reached. Thus, even though the red candle opened at 2.95 and closed at 2.25, it rose as high as 3.00 and fell as low as 2.00 during the period in question.

Candlestick Chart Structure
Figure 1: The Structure of a Candle

Upward, Downward and Horizontal Trends

Candlestick charts are often used to identify Forex trends. Chart 2 presents the price of gold from October 9th-10th. The chart shows that gold rose to $1233.23 in October 9th. This was followed by a downward trend to a value of $1220.63 in October 10th.

The upward trend is represented by the rising line while the downward trend is represented by the falling line.

Upward and Downward Trends
Figure 2: Upward and Downward Trends

Gold was traded at approximately $1243.50 between October 16th and 17th. As illustrated in chart 3, the price of the commodity was relatively stable in these dates.

In Forex, an upward trend benefits traders who placed long positions while a downward trend benefits traders who placed short positions.

XAUUSD Stable Trend Example
Figure 3: Stable Trend

Using Channel Lines to Identify Trends

A channel is formed when the candlesticks in a chart move at a certain direction within two equidistant parallel lines. The top line of a channel is formed next to the highest points of each candle while the bottom line is formed next to the lowest points. Channels can be used to mark the general movement of an asset’s price.

Chart 4 illustrates the upward movement of the AUD/USD from March 24th to April 10th. This channel moves upwards and reaches 0.9459. This means that a trader who placed a long position on March 24th and closed the order on April 10th could have made substantial profits.

It is important to note that a channel may change its direction. After reaching its highest point, the channel may begin to move downwards. Thus, traders should constantly monitor a channel to identify the most suitable times to enter and exit a trade.

Upward channel example
Figure 4: An AUDUSD Upward Channel

Chart 5 shows the downward movement of the GBP/USD from June 17th to July 3rd. As illustrated below, placing short positions on June 17th and closing the trade on July 3rd could have resulted in significant earnings.

Downward Channel
Figure 5: A GBPUSD Downward Channel

A downward channel may change its direction and start moving upwards. Hence, investors should always monitor a channel and be prepared to act once it changes its course.