Forex Technical Trading – Trend Change

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A few weeks ago I wrote about methods of identifying the trend. The trend, defined as the overall general direction a currency pairs price is moving. We have all heard the saying “the trend is your friend”, however, trends do and will change…..eventually. But how can you identify those moments at or near the beginning of the change without waiting weeks or even months only to look back and say “I wish I knew the trend was changing back then”.

There are a lot of ways of identifying momentum shift or overbought and oversold conditions, but I want to focus in on how to actually visually identify that change is taking place.

First, there are the candlestick formations. These are a single identifier that a potential shift in buyers and sellers are taking place. These can be a great beginning clue to trend change. For example a Shooting Star tells us that the buyers are losing ground and the sellers are gaining momentum. Or it could be a hammer that tells us that the sellers may be losing their hold on a currency pair. These in my opinion are just the beginning.

Then you have chart patterns. These are typically made up of multiple candlesticks forming an identifying pattern of reversal. Patterns such as the Double Top or the Head and Shoulders inform us of an impending fall at the top of an uptrend. These again are a good beginning clue to trend change at or before the trend has actually changed.

Both of these identifiers are a clue that change is probable but has not yet occurred.

So, how do you know then that trend change is actually happening? Go back to the basics! An uptrend can be identified as having higher highs and higher lows and a downtrend has lower highs and lower lows. It’s that simple!

I want to provide a few examples of this simple yet effective method of identifying trend change and potential entry points at or near the beginning of the change.

Let’s start with the GBPUSD on April 11^th (see chart below). For some time prior to the 11^th the pair was in an easily identifiable uptrend for the month with rising lows and highs. The next “clue” to change happens with the break of the trend line. A break would be identified as a single candle open and close on the opposite side of the trend line. Once the break occurred the next thing to watch for is the retest of the underneath side of the trend line. With this break several things happened at the same time to point to the impending fall. With the retest of the trend line came the formation of the double top, then after falling off the double top an Engulfing candle formation is seen on the 1hr chart. At this point you now have 3 different unique identifiers of trend change. It’s time to enter the trade around the 1.6400 level. As it falls, continuation is brought on by the breaks of former support lows (lower lows identify a downtrend) and eventually it settles at 1.6250. That’s 150 pips from the identified trend break pattern!

Let’s move to the USDCAD on April 12^th. The 4 hour chart shows a downtrend for about a month now (see chart below). The pair has found a base in the mid to low .9500’s and showing signs of potential change. On the 4hr chart there has now been several open and closes above the trend line. We are now waiting for the retest and entry point.

Moving to the 1hr chart (see below) the retest happens near the .9590 area, which also lines up with the 50% retracement level of the previous move up. Entry is made at .9590. Initial targets would be back to .9640 at the previous high netting 50 pips to the first target. But as I have pointed out, if this high is broken it confirms further movement higher to target back to .9700 area or the next high.

Moving to the AUDUSD on April 12^th. The 4 hour chart shows a significant uptrend. However, now dropping from the highs and showing the open and close below the trend line. (See below)

Shifting to the 1 hour, we can see the retest of the trend line near the 1.0500 area. This also coinsides with the .382 fib of the last downtrend. A sell near the 1.0500 level targets back to the former lows near1.0425 and the .786 fib of the previous range netting 70 pips on the trade at maximum target.

These 3 opportunities alone have netted over 250 pips. If you have had trouble with identifying trend change I would encourage you to keep it simple!

Ross Mullins

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