How many times you have seen an FX pair, or any other instrument for that matter, start moving opposite to the trend? Did you wonder was it a mere correction or were you perhaps witnessing a change in trend? Your conclusion will have an acute impact on how you choose your next trade and thus your profit or loss.
Natürlich, it’s impossible to be 100% certain. But here are three simple methods that could help you decide which could dramatically improve your odds of being right.
Correction zone
The first method to identify a correction or a change in trend is one I like to call the “zone method.” The idea behind it is rather simple.
When a support line has also been a resistance line it’s no longer just support and resistance. Vielmehr, it is a border trimming between two separate zones. One is a zone where the pair is bullish and likely to move higher. The other is a zone where the pair is bearish and likely to move lower.
If that zone hasn’t changed, then it’s a temporary correction. If the zone has changed, then it’s a change in trend. From the EURUSD chart below you can see when the 1.168 was broken back in 2014, the pair moved into a bearish zone. If the EURUSD had rebounded back to the bullish zone, then that would mean the trend had changed to bullish.
The Trend Average
The second method that is useful in gauging a correction or trend change is done by running a moving average. The trick here is to play with the average period until it captures nearly all the trend. You can also switch between an exponential moving average and a simple moving average. Manchmal, an exponential captures the trend better and other times, a simple moving average is all you need. The idea here is to tweak, or fine tune, Wenn man so will. In our case, the trend has to be below the average.
Once you have done that, you need to see how the current correction stakes up against the rest. If the latest correction is below the average then it’s a mere correction. If the average is broken, the trend has changed, just as can be seen in the chart below.
Notice that this method is usually effective where the trend is on a rather linear path. It might work on more volatile trends but it will not always be effective.
Failed Record
The last of the simple signals is actually more a matter of probability than a proper signal. And it’s actually the simplest to identify. Simply put it is when a pair fails to break a record and it doesn’t matter if it’s a record high or record low.
In der Regel, three is the lucky charm. Say the pair fails to break a record on the third attempt, as in the examples below. Dann, there’s a higher likelihood that this is more than a mere correction. When a record high or record low is involved, there’s a much higher likelihood that this is not a mere correction but a change in trend.
Abschließend
As you may expect, there are many more methods to differentiate between a correction and a change in trend. Some are more advanced and complicated. Others, like Fibonacci retracement which often times is used incorrectly, tend to be misleading.
While the methods above are far from perfect, the average trader might find that they are simple and easy to implement. They could, Daher, serve him well as he tries to determine if the pair is in correction mode or an actual change in trend.
Saz Dosanjh sagt
In my experience one of the hardest tricks to learn is where to put the support / resistance lines to begin with. The only way I’ve found is just keep trying until your trades improve! Then you would have the same support zone readings described above.
For the Fibonacci type re-tracement methods I tend to only pay attention to the adage “more than 20% is a bear market” because it is so widely touted in the media it tends to be self-fulfilling. Other than that I would agree that Fibonacci gets overcomplicated quickly and can be more of a distraction than anything useful.
Good post, this is a tricky subject and not many writers tackle it well.
Shaun-Overton sagt
Hey Saz,
Vielen Dank für Ihre Erfahrungen. That’s good advice about continuing to try. It’s never fun to fail. If you tell yourself in advance that you’re “experiementing” (d. h., not desiring but accepting the risk of failure), it’s much easier to take the psychological abuse of losing.
The KISS rule always applies – Keep It Simple, Stupid.
–Shaun
Erik sagt
“The second method that is useful in gauging a correction or trend change is done by running a moving average.”
what period of moving average? 1? 10? 100? 1000? without it it is simply a useless advice (i have no idea which one to use).
i have no hope to get an answer unfortunately, i can see that here were no engagement from an author since article came out.
Shaun-Overton sagt
Hi Erik,
The period should be relevant to the expected holding time of your trade, as measured in bars. If your average holding time is 24 hours and you trade on H1 charts, then you should use something close to a 24 Periode MA. If you only hold trades for 5 Balken, then it should be a 5 Periode MA.
–Shaun
–Shaun