Using Trend Lines During Technical Analysis
Trading Forex trend lines are regarded as the most common element of technical analysis used in Forex. Trend lines are however, also regarded as one of the most underutilized forms of technical analysis.
Trend lines can simply be defined as indicators of momentum in the foreign exchange market.
Foreign exchange trend lines indicate the change in share price over a given time frame and may be used as an alarm to indicate sharp acceleration or deceleration of trends in the market. Trend lines thus incorporate the direction and speed of a trading price. FX trading trend lines can also aid as visual indicators of price patterns during times of concentrations in price. A lot can be deducted from this fairly simple graphic method. Profitable entry and exit points, good position on protective stops and emerging trends are a few. Trend lines are invaluable in forecasting trend reversal (indicating a reverse direction in market price).
What is the difference between FX trading trend lines and other momentum based indicators?
Other momentum based foreign exchange trend lines are constructed by means of formulas and the use of computers and computer software. Forex trend lines are solely created from the human brain and are visual indicators, meant to be used as quick reference charts.
How to draw Forex tend lines:
Draw trend lines through the lows of an increasing trend and draw trend lines through the highs of decreasing trends.
Draw trend lines are drawn through long term closing price indicators.
Normal or logarithmic charts may be used to draw trend lines.
Foreign exchange currency trend lines are only valuable if placed through at least 3 troughs (decreasing market trends) or at least 3 peaks (increasing market trends).
Foreign exchange currency trend lines are not useful if they intersect through currency movement charts.
Two or more points are needed to construct a trend line.
The more points obtained, will increase the accuracy of the deduced support and resistance levels indicated by the line.
A trend line break does not automatically indicate a change in trend movement.
Use at least two points to draw the trend line and a third to confirm the validity of the line.
It is common for any quantity of secondary and smaller trends to form within the scope of the main trend that is plotted.
Types of Trading Forex Trend Lines
Trend lines can appear in three major forms:
Ascending trend – showing a incline in the forex market trend
Descending trend – showing a decline in the forex market trend
Reversal trend – showing that the forex trend has started moving in the opposite direction
These reversal trend lines are characterized by broken trend lines. A trend line is identified as broken as soon as a full length bar body appears on the opposite side of the line.
Trading Forex trend lines are unable to be used to predict levels of support and resistance. The reason is that support and resistance never run at an angle. Support and resistance direction will only move horizontally.