Our clients who are just beginning to internalize in this type of market commonly use indicators known as trend lines. Trend lines can be defined as an indicator of momentum in the currency market. Forex trend lines indicate the change in the price of a pair of currencies at a given time and can be used as an alarm to indicate the direction and speed of the price in a buy or sell operation. Trend lines also show us the direction of the market and levels of support/resistance. But most importantly, they help determine entry and exit times.
Many forex traders, however, draw trend lines incorrectly by plotting a line that fits market prices.
“Forex trend lines are probably the simplest form of technical analysis that currently exists”
The information below explains how trend lines should be drawn:
An upward trend line is drawn below the price points of a trend. When the rising trend line is broken by prices, it can be a signal of high probability of the end of that trend. Both ascending and descending lines are usually considered valid when they touch the prices at least three times.
Bearish Trend Lines
Bearish trend lines connect minimum points within a downward trend. A trend will descend when the successive minima occur at ever-lower prices.
Example: The trend line is drawn high in the areas of resistance or peaks.
Bullish Trend Lines
A trend will be bullish when the peaks are observed at increasing prices. These maximum points are called supports because once the prices reach those regions, they usually rise again. It is drawn in the lower part of the easily identifiable support areas or valleys.
Much can be deduced from this simple graphical method including cost-effective entries and exit points, good position in protection stops, and emerging trends. Trending lines are very valuable in predicting a reversal trend (indicating a direction of decline in the market price).
Forex trend lines are probably the simplest form of technical analysis that currently exists. And they are also probably one of the least used. If they are plotted correctly, trend lines can be as accurate as any other method. Unfortunately, many traders do not plot them as they should or they try to make the line fit the market rather than the other way around.
Some of the more sophisticated trading platforms such as cTrader (offered by Tradeview), draw trend lines and provide other indicators for the trader so that it doesn’t have to be done manually, eliminating the possibility of error.
Business Development Manager – Tradeview