Forex Analysis: Determining Trend Sustainability

A lot of new forex traders make the mistake of concentrating solely on finding a trend and jumping in, hoping to make a profit. The problem is that they often fail to see the signals that the trend is about to end and thus end up losing a lot of money, because they did not exit at the right time.

In order to avoid getting involved in this kind of situation, it is important to take the time to study the tools capable of evaluating the life span of a forex market trend.

There is no shortage of forex technical tools for forecasting the life span of market trends and price reversals. Among the most frequently used are Parabolic SAR, Stochastics and RSI.

Of all these tools, the easiest to use is probably the Parabolic SAR (Stop and Reversal). This utility is always used in trend heavy forex markets and in conjunction with candlestick charts. To use the Parabolic SAR, the forex trader simply needs to look at the dots.

If the dots are above the candlesticks, it means one should sell their currencies. If the dots appear below, then it signifies that it is time to buy.

Another tool used by forex analysts to monitor trends are Stochastics. This consists of two lines, the %K and the %D, and a 0-100 scale. Stochastics are mainly used by analysts and traders to determine if the forex is overbought or oversold. The determining factor is the scale; if it registers above 70, chances are the market has been overbought and if it is below 30, then the market is oversold.

An overbought market indicates prices will drop, and an oversold one connotes the exact opposite. The lines, on the other hand, move like those of the MACD, and when the faster %K crosses by the slower %D, it could be indicative of a trend change.

The RSI (Relative Strength Index) works in a way analogous to Stochastics, in that it monitors the buy/sell status of the forex market. The RSI also has a measuring scale. An RSI reading of over 80 suggests an overbought market, while a scale registering below 20 means the forex is oversold.

Another area in the RSI scale the trader should look at is the 50 level. If the RSI moves above 50, it could signify an incoming trend. If it falls below that mark, it could be the beginning of a downtrend.

All these tools -Parabolic SAR, Stochastics and RSI- have their uses and drawbacks, as with all technical analysis tools. They are not perfect, and alone, cannot determine the exact outcome of the trading session. There is not one tool that can accomplish that task, as the forex is simply too complex.

The ideal way to utilize these trend indicators is by testing them out yourself, see which fits your trading style, and then apply it in conjunction with other tools and analysis. By combining these tools properly, you will be able to profit from the forex more easily.