Learn Everything about Trendline Analysis in Forex
Great breakthroughs have surfaced with electronic trading and certain technical indicators are widely used. Nevertheless an affluent trader should be very skilled with trendline analysis in order to correctly predict Forex price movements. “Trend is my friend” is commonly said among traders. In this chapter you will learn how to correctly apply trendline analysis, one of the most important tools in your trading analysis.
Market moves following some patterns. Movement of the market is either up (upward market), down (downward market) or sideways (flat or non trending market). Always avoid flat markets because market is fighting to make a decision and trading signals are cancelled because of the market sentiment. Watch bellow a real market example of flat type of movements. Remember: the longer the flat market the greater the outbreak will be because when market decides the next direction then a new trend evolves and many traders follow this trend.
This figure shows a flat market
This figure displays a downtrend market environment
Always remember: the longer the time period the most accurate your analysis will be. Always look the longer time charts and transfer your analysis to shorter time period. This last tip is something that is only referred in this book and can only be acquired through experience in trading. For example in a daily chart market may look flat and non decisive and in 1 hour chart you may recognize a trading signal. In this occasion you should be very skeptical. Or worst, daily charts shows downward trend and 1 hour chart shows a trading signal to get long. This way you may be caught up in the wrong direction. Continue reading to learn exactly how to avoid these traps.
SUPPORT AND RESISTANCE LEVELS
Market prices move in zig zag fashion. Peaks represent the price where more people sell than buy so market couldn’t overcome this price. These prices are called resistance levels. The troughs on the other hand represent the price where buying pressure was higher than selling. These troughs are called support levels. Connecting consecutive peaks a trader has a resistance line and connecting resistance levels a trader has support line.
The first you have to learn is to draw support or resistance lines correctly and how to evaluate the significance of each line whether it is support or resistance.
When you realize that the market is upward trending you should draw a resistance line. To draw a resistance line pick up two peaks and draw the line connecting these peaks. See figure below. When a third contact point occurs then trendline is confirmed. Generally currency markets maintain its direction of trend.
A resistance line in an uptrend
Follow these rules to see whether your trendline is significant:
1) At least two peaks are connected. More connecting peaks confirm the trend line.
2) Most significant trend lines occur around the angle of 45 degrees. Trendline at sharper angles are indicating that trend is strong. Lower level trendlines indicate that trend is close to reversal.
3) Longer period trendlines should be given increased weight. Day charts trendlines are more significant that 1 hour charts.
4) Minor trendline penetrations (as long as 1%) should and may be disregarded. When connecting two peaks never mind about a peak penetrating a bit the trendline.
5) When you draw a trendline in candlestick or bar charts and connect two peaks or troughs and there is an intermediate shadow over the trendline this is not considered a break as long as the closing price is below the trendline See figure 2.13
The same apply for connecting two troughs although the trendline is named support. Support lines are drown in downtrend markets
Support line is drown is a downtrend market
The most important thing about support and resistance lines is that when a confirmed support or resistance is broken then broken trend line is retested and support line becomes resistance and resistance becomes support. Notice below how the support line when broken became resistance.
A broken resistance line is broken then retested and became support
This way you already have the first prediction utility of market movement. Watch carefully market when it reaches significant support of resistance levels.
Test a lot with trend line support and resistance and channel designing (see below for channels). These are one of the most important tools you will ever use so it is very crucial to know how to use them correctly.