Every strong trend is eventually broken, or at least takes a breather. It’s important to recognize when this transition is taking place in order to be able to respond accordingly. If not, it’s a classic example of not being able to see the forest over the trees. Getting caught committing too heavily to a trade in either direction when a pair is in transition can result in multiple strings of loses. Nobody wants that!
So what does a transitioning trend look like? The other day I talked about GBPUSD and how the higher timeframes were in obvious downtrends. But what I didn’t mention too much was the lower timeframes and how those are actually showing potential uptrends. This is a classic example of a trend that is now in transition, and the biggest tip off to this is often our trend and trade tracker tool. Here’s what it was showing yesterday:
Yesterday the weekly and daily timeframes were both in downtrends, yielding a sell signal on the daily chart. But the hourly and 15-minute timeframes were in uptrends, yielding a buy signal on the 15-minute chart.
This is a clear transition as the previous prevailing trend (the downtrend in this case) is now at risk.
Watch the transitioning timeframe
We clearly have a tug-of-war going on here. Either the larger downtrend will prevail and we’ll see a trend continuation, or price will continue ascending and flip the major trend to an uptrend. We can clearly see this on the 4-hour chart:
Notice how price is trading above the 200-bar SMA and the 50-bar has now crossed the 200. According to our Forex Trend Trading Ultimate Guide, this is a textbook example of a ‘developing uptrend‘. And while this is still technically a sideways trend type, the name should provide enough of a clue to be cautious. This could quite easily turn into an uptrend.
And if the 4-hour chart does go full-blown uptrend, we’d be getting a buy signal now on the 1-hour chart. That’s a stronger signal than a buy signal on a 15-minute timeframe.
How to trade transitioning trends
If you’re new to forex trading, I don’t recommend trading in this type of transitioning trend environment. It’s tricky and takes experience.
When I trade this type of setup I generally favor the lower timeframes and the trends I’m seeing there. But it’s important to stay extremely nimble. I covered my GBPUSD longs last night as seen from my SignalStart history:
Those wins were a nice start to the week, and I know the handful of traders copying the signal appreciated it.
But I’m now actually long GBPUSD. Like I said above, you need to stay nimble in this type of environment while price action works itself out and decides on its next move.
I hope that helps explain my thinking around transitioning trends and how I approach them. Again, this type of trading is a bit more advanced and not something I recommend beginners tackle right away. There are often easier opportunities to collect pips like the awesome, obvious uptrends happening in USDCAD right now.