Sure, the price may go against the trend every now and then, but looking at the longer time frames would show that those were just\u00a0retracements.<\/p>\n\n\n\n Trends are usually noted by \u201chigher highs\u201d and \u201chigher lows\u201d in an uptrend<\/strong> and \u201clower highs\u201d and \u201clower lows\u201d in a downtrend<\/strong>.<\/p>\n\n\n\n When trading a trend-based strategy, traders usually pick the major currencies as well as any other currency utilizing the dollar because these pairs tend to trend and be more liquid than other pairs.<\/p>\n\n\n\n Liquidity<\/strong> is important in trend-based strategies. The more liquid a currency pair, the more movement (a. k. a. volatility<\/strong>) we can expect.<\/p>\n\n\n\n The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges.<\/p>\n\n\n\n Other than eyeballing price action, you can also make use of technical tools you have learned in previous sections to determine whether a currency pair is trending or not.<\/p>\n\n\n\n A way to determine if the market is trending is through the use of the\u00a0Average Directional Index indicator\u00a0or ADX for short.<\/p>\n\n\n\n Developed by J. Welles Wilder, this indicator uses values ranging from 0-100 to determine if the price is moving strongly in one direction, i.e. trending, or simply ranging.<\/p>\n\n\n\n Values more than 25<\/strong> usually indicate that price is trending or is already in a strong trend.<\/p>\n\n\n\n The higher the number is, the stronger the trend.<\/p>\n\n\n\n However, the\u00a0ADX\u00a0is a lagging indicator which means that it doesn\u2019t necessarily predict the future.<\/p>\n\n\n\n It also is a non-directional indicator<\/strong>, which means it will report a positive figure whether the price is trending up or down.<\/p>\n\n\n\n Take a look at this example\u2026<\/p>\n\n\n\n Price is clearly trending downwards<\/strong> even though ADX is greater than 25.<\/p>\n\n\n\n If you\u2019re not a fan of the ADX, you can also make use of\u00a0simple moving averages.<\/p>\n\n\n\n <\/p>\n\n\n\n Place a 7 period<\/strong>, a 20 period<\/strong>, and a 65 period Simple Moving Average<\/strong> on your chart.<\/p>\n\n\n\n Then, wait until the three SMAs compress together and begin to fan out.<\/p>\n\n\n\n If the 7 period SMA fans out on top of the 20 period SMA and the 20 SMA on top of the 65 SMA, then the price is trending up.<\/p>\n\n\n\n On the other hand, if the 7 period SMA fans out below the 20 period SMA, and the 20 SMA is below the 65\u00a0SMA, then the price is trending down.<\/p>\n\n\n\n One tool that is often used for range-bound strategies can also be helpful in trend discovery. We\u2019re talking about\u00a0Bollinger Bands\u00a0or just Bands.<\/p>\n\n\n\n One thing you should know about trends is that they are actually quite rare.<\/p>\n\n\n\n Contrary to what you might think, prices really range 70-80 percent of the time<\/strong>.<\/p>\n\n\n\n In other words, it is the norm for the price to range<\/strong>.<\/p>\n\n\n\n So, if prices deviate from the \u201cnorm\u201d then they must be in a trend, right?<\/p>\n\n\n\n What is one of the best technical tools we have mentioned in the previous grades that measure deviation?<\/p>\n\n\n\n If you said a ruler, we give you mad props for effort.<\/p>\n\n\n\n If you said Bollinger Bands, we\u2019ll give you cyber milk and cookies! Here, take some.<\/p>\n\n\n\n Bollinger Bands actually contain the standard deviation formula. But don\u2019t worry about being a nerd and figuring out what that is.<\/p>\n\n\n\n Here\u2019s how we can use Bollinger Bands to determine the trend! Prepare for the craziness.<\/p>\n\n\n\n Place Bollinger Bands with a standard deviation (SD) of \u201c1\u201d<\/strong> and another set of bands with a standard deviation (SD) of \u201c2\u201d<\/strong>.<\/p>\n\n\n\n![\"Downtrend\"](\"https:\/\/bpcdn.co\/images\/2016\/05\/grade12-market-trending.png\" "\\"Downtrend\\"\/")
<\/a><\/figure>\n\n\n\nADX in a Trending Market<\/h2>\n\n\n\n
<\/a><\/figure>\n\n\n\nMoving Averages in a Trending Market<\/h2>\n\n\n\n
<\/a><\/figure>\n\n\n\n<\/a><\/figure>\n\n\n\nBollinger Bands in a Trending Market<\/h2>\n\n\n\n