Properly distinguishing between retracements and reversals can reduce the number of losing trades and even set you up with some winning trades. Classifying a price movement as a retracement or a reversal is very important. There are several key differences in distinguishing a temporary price change retracement from a long-term trend reversal.

A popular way to identify retracements is to use Fibonacci levels. For the most part, price retracements hang around the If the price goes beyond these levels, it may signal that a reversal is happening. In this case, the price took a breather and rested at the Another way to see if the price is staging a reversal is to use pivot points. If broken, a reversal could be in the making!

3 Easy Methods to Identify the Trend in Forex

For more information or another refresher, check out the Pivot Points lesson! The last method is to use trend lines.

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When a major trend line is broken, a reversal may be in effect. Moving averages are the most common and obvious choice for many traders as virtually every charting platform has them. One of the most common ways is to combine two moving averages, for example, the 9 EMA and the 18 EMA and whatever direction the faster moving average in this case, the 9 EMA crosses the slower moving average, that is taken as a confirmation that a new trend is in progress.

Trend Lines

Always remember the technical indicators lag price. Moving averages can give you, at a quick glance, the state of the last X number of candlesticks averaged out. For example, a 20 period moving average will average out, usually the closing prices, of the last 20 periods. Depending on the length of the moving averages you are using, you will be late to any trend change so at best, you will get into a new trend not at the beginning, but close to.

All you are seeing with a moving average is the increase or decrease in the average price which can change for a variety of reasons. Still, moving averages, especially the direction of the period moving average , are popular indicators to use to show a change in the trend.

1. The Highs and Lows Tell the (Whole) Story

The main problem with using support and resistance to indicate a trend change is the bigger the time frame, the further out you may have support and resistance levels. On a daily chart in Forex for example, it is not unusual to see a price swing of pips to the upside from support. In order to change the trend to a down trend, price will have to travel at least pips to the downside to indicate a trend change.

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Support and resistance is popular but you can see that just like moving averages, you will not get the beginning of a trend change, the actual turn. What if you had to wait pips for a downtrend to form but price trends to the downside for pips?

How to Identify Forex Trend Using the Moving Average?

Is it worth the wait? One of the best ways to determine the end of a trend is to use a trendline …more specifically, the breakout of the trendlines. Trend lines can be highly subjective among traders and there is usually multiple trend lines covering the overall trend. This is called fanning trend lines. You will have a shorter term trend line, an intermediate trend line and a long term trend line.

You learned you can use indicators and market structure to determine trend changes but this method — failure tests — is my favorite methods to catch turns.