Understanding Market Trends & Trend Identification Systems
Accurately recognizing a strong Forex market trend can lead to significant trading profits. Forex currencies tend to trend well, often making long, directional moves. During these extended trends, the likelihood of making profitable trades increases substantially.
Distinguishing Market Trends
There are two main types of trends:
(i) Primary Trend
The primary trend is the major market trend. It can last for weeks, months, or even years and typically includes several shorter-term secondary trends. According to Dow Theory, the primary trend strongly influences secondary or minor trends within the same market. Long-term goals of key central banks—especially the Federal Reserve (FED)—play a major role in shaping these primary trends.
(ii) Secondary Trend
A secondary trend is less significant than a primary trend and can last from hours to weeks. These trends often move in the opposite direction of the primary trend and include short-term corrections, take-profit phases, or bear market rallies.
Ranging Markets
Secondary trends also occur in flat or sideways markets, where prices move within a defined range. When the price reaches the upper or lower boundary of this range, it often retraces in the opposite direction, beginning a new secondary trend. This behavior is characteristic of ranging markets.
