Every forex trend has different phases, and traders must understand these phases in order to predict the trend’s future course. These phases include the Smart Money phase, the Euphoria phase, and the Consolidation phase. Let’s take a nearer glance at each one. Once you know which one you’re in, you can begin placing your buy or sell trades.
Euphoria phase
A forex trend can go through a euphoria phase, where traders are unsure of whether the trend will continue or end. As an outcome, they are hesitant to take a strong counter-trend position. Instead, they will sell into strength as the trend makes new highs. A head-and-shoulders pattern can signal this stage. It is an indication that buyers have temporarily gained the upper hand and can break successive resistance lines to continue the rally.
At the peak of the euphoria phase, IPOs go up and mainstream investors start acknowledging the bull market. In addition, the news flow is generally positive. The euphoric phase usually lasts the longest in a bull market. Moreover, during this stage, the volume and volatility in the market increases. As an outcome, more people will invest in stocks.
The third phase of a forex trend occurs after the first two phases. This is the most volatile phase of the trend. Traders may place buy or sell trades during this phase, but they are not always successful. Traders require to understand the dynamics of the market to be able to time their trades. Although turns out to be difficult to predict the exact beginning of a forex trend, there are a few basic characteristics that traders should be aware of.
Smart Money phase
The Smart Money concept is an important part of trading. It means buying in the market, either a particular stock or currency pair. The ideation is to buy when the price has reached a certain level that is likely to lead to a higher price. This is the opposite of selling when you are trying to avoid losing money.
Smart money is more sophisticated than ordinary investors and traders and has the ability to manipulate prices and cause price trends to change. For example, it can define a POI and wait for the price to hit this level. Alternatively, it can wait until the price is in a strong buying zone. By recognizing these signals, you can ride the coattails of these investors and profit.
Smart money is the cash invested by seasoned investors and knowledgeable, “in the know” traders and investors. Their money drives many different speculation techniques.
Consolidation phase
A stock’s price will move up and down for a period of time, and then break down and move down again. This is called a consolidation phase, and it is a sign of weakness within the stock. Traders will profit from this consolidation period by leveraging the price volatility of the stock.
The size of the consolidation will determine how robust the breakout will be. A smaller consolidation period and narrower boundaries indicate a weak breakout. This means traders must act very carefully during this phase. The downside of trading during a long consolidation period is the risk of an underlier falling back into the consolidation phase during reaffirmation.
Traders should look for a breakout in the direction of the trend. A breakout is when the price breaks through a defined resistance or support level. The breakout is usually accompanied by a significant increase in volume.
Reversal phase
When a trend is in its reversal phase, you will want to be prepared to make a quick exit. You may want to look for price action confirmation, but you can also use technical indicators. You should look for candlestick patterns that indicate that a price has broken below a certain level and failed to return above or below it. In addition, you may want to look at volume. Volume in the forex market is less reliable than in the stock market, but it can still be helpful.
Another indicator that can be used to detect a trend reversal is a divergence between the price and oscillator charts. This divergence occurs when the subsequent lows on a downtrend graph are lower than the previous lows. Divergence can also be detected in volume, which is the number of trades made in the Forex market over a period of time. When volume increases, it’s a sign that the trend is changing direction.
The balance of the market reverts during this transition phase. During the fall, the selling weight is higher than the buying weight, and the market begins to trend down. Then, it reverses and starts rising again. The head and shoulder pattern is the most common reversal pattern, but it requires a prior trend before it reverses.
