The Stages Of A Forex Trend

A trend is simply a tendency for prices to move in a particular direction over a period of time. Trends can be long term, short term, upward, downward, and even sideways. When investing in the forex market, your success is tied to your ability to identify trends and position yourself for profitable entry and exit points. Let's look at some stages of a forex trend and how they affect investors.
Economic Trends Reflected in Currencies
For the most part, an economy that is strong will also have a strong currency. Economic strength attracts investment, and investment creates demand for a currency. In recent times, the demand for gold as an alternative to fiat currencies has led to a currency demand in those countries that produce gold, such as Australia, South Africa and Canada.
Example of a Trend in the Australian Dollar Against the U.S. Dollar
Note how the economic factors, in this case a demand for gold and the higher interest rates in Australia, have created a demand for the Australian currency. The demand will last until the exchange rate becomes too high and negatively affects Australian exports.

In addition, factors in other economies have to be taken into account, since no single currency can act in isolation of the rest of the world's economies.

The chart below (Figure 1) of the weekly AUD/USD shows the recent upward exchange rate trend in the Australian dollar against the U.S. dollar. While the price (exchange rate) oscillated back and forth in a regression channel, providing some short-term trades in the opposite direction, the prevailing upward trend remains in tact.
U.S. Dollar versus the Canadian Dollar
In the chart below, the Canadian dollar has strengthened against the U.S. dollar. Canada is also a commodities-producing country, with a lot of natural resources.

In the case of the Australian dollar chart, there is an upward-sloping growth path as the demand for Australian dollars increases. Since the Australian currency is the base currency and the U.S. dollar is the quote currency, the chart shows a strong upward-trending and strengthening Australian dollar.

On the other hand, in the case of the Canadian dollar against the U.S. dollar, the U.S. dollar is the base currency while the Canadian dollar is the quote currency. Thus the chart shows the U.S. dollar sloping downward as it weakens against the Canadian dollar.
The conventional wisdom amongst traders is that "the trend is your friend." While this is good advice, we have to add the cautionary line that "the trend is your friend … until it ends."