How Can Traders Identify the Strongest Part of a Trend

What Should One Do To Identify The Strength Of A Trend?

As one must be aware of, in the world of forex trading, there are two schools of trading- Technical Trading and Fundamental Trading. While fundamental trading involves traders following market cues and setting positions on the basis of the same, the usage of technical is a different ball game. In technical trading, traders use charts to analyze the price trends and trade on the basis of the same. This style is quite prevalent in short-term forex trading practiced by traders in Sri Lanka and elsewhere around the globe.

In technical trading, the trend is the Holy Grail. Identifying the right trend and having an early entry into it is an important part of devising successful forex trading strategies and is crucial for success in the long run.

However, when determining a trend, it is not just important to know about its presence, but also know about its strength and direction. While the direction is easy to discern, finding out the strength is a slightly complicated process.

How Can One Identify The Strength Of A Trend?

One sure-shot method of identifying the strength of a trend is to use the ADX indicator. ADX, which stands for Average Directional Index, measures the strength of a trend and indicates whether the trend may hold up or wear off.

How Can The ADX Scale Be Interpreted?

The ADX indicator is an effective strength indicator, but not a direction indicator.

Hence, a strong trend on ADX could either be an upward trend or a downward trend and traders should be wary of this fact.

Steps To Interpret The ADX Scale: - When the indicator is between 0 and 20, it means that the market is in a trading range.

- When the indicator gets above 20, it means that a good trend is about to begin.

- When the ADX indicator gets to 25 and above, it means that the market is in a strong trend.

This clearly shows that one must look to open a position during forex trading in Sri Lanka only when the ADX value is above 25. However, ADX can never be used alone. It always needs to be used along with other directional indicators such as MACD. Coupling ADX with other indicators can help traders set entry and exit signals.

For novice traders who are new to the field, the setting of trading signals on the basis of such indicators may not be an easy task. For such traders, it is wise to collaborate with a reputed online trading broker in Sri Lanka like WesternFX to gain expert assistance.