What Are Trend Lines And How Do You Use Them To Make Money In FOREX?
When you examine a FOREX chart you can see the price movements moving up and down in wave like patterns.The price swings from highs to lows in an unpredicatable way (or so it seems). The price chart can be compared to a mountain range where you can see the jagged line of the mountains as they touch the sky.
The chart is either in an uphill trend, a reinforcing (consolidating) position, or it is in a downward trend. For the scope of this article we are going to discard the consolidation phase and concentrate on the trends.
When a market is in a rising or in a descending passage for a period of time then we say it is in a trend.
What is a trend?
An upward trend starts from the bottom left and ends in the top right of an area of a chart. It is a slope that is a series of highs that can be connected to make a sloping line. A downhill trend starts from the top left and ends in the bottom right of a chart. It is a slope that is a series of bottoms that can be connected to make a sloping line.The greater the number of tops or lows that connect to form these lines, the more enforceable the lines are and so are more likely to repeat in the future.
So how do trend lines work when it comes to your trading?
After you have spotted a trend line then it can be projected so that it can be used for prices in the future. This trend line now becomes a future support or resistance area which is a probable area for a u-turn.
The reliability of a trend line for predicting future price movements is dependent on things like the number of points it has hit previously. Another parameter to consider is if there are any combination of indicators at the same place supporting the trend line?
Different indicators that can help here include Japanese Candlestick formations, relative strength and momentum indicators, support and resistance areas, round numbers, and moving averages. Another important aspect is to examine higher timeframes to see if other trend lines are occurring in the same place and so reinforce the existing trend change. All of these examples provide supporting evidence that something is about to happen.
When price approaches a trend line, one of two things can happen. Either it can recoil off the line and go back the other way, or it can break through the line. We are never certain either way and as traders we must be prepared for both possibilities. Sometimes the price might break through the line and shift track. This happens when price breaks through a trend for 2-3 days and then suddenly retreats and continues in the original direction.
Finding unions will help to eliminate the chances of false breakouts. When you are trading these moves it is sensible to use a tight stop loss strategy to ensure you lessen any potential losses. If there is a breakout from the track then there is a high probability that a new trend will begin along in a new direction. Remember that a new direction is confirmed when a line can touch three or more highs or lows. Two points is not reliable enough to confirm a new trend.
How do you make profits from trends?
If a trend has been determined then you wait until price approaches the trend line again in the future. If there is a combination of other indicators at the same time, then you can open a position in the direction of the possible reversal with a stop above where you think the turning point will occur. Don't place this order until the reversal has happened. The setting of the stop loss must fit within your risk management plan.
Now if the price ignores the tend line and breaks through with great strength then a change in the original trend would have occurred. So now the trader opens a position in the direction of the new trend and sets their stop loss just behind the proceeding trend line. The stop loss should also fit within your risk management plan.
Conclusion.
Trend lines are very important signs of where a market may be heading next. Project these lines into the future and use them as possible future support and resistance points. If they are located in conjunction with other indicators supporting the same change in direction or supporting the current direction then open a trade and take advantage of these movements.
The chart is either in an uphill trend, a reinforcing (consolidating) position, or it is in a downward trend. For the scope of this article we are going to discard the consolidation phase and concentrate on the trends.
When a market is in a rising or in a descending passage for a period of time then we say it is in a trend.
What is a trend?
An upward trend starts from the bottom left and ends in the top right of an area of a chart. It is a slope that is a series of highs that can be connected to make a sloping line. A downhill trend starts from the top left and ends in the bottom right of a chart. It is a slope that is a series of bottoms that can be connected to make a sloping line.The greater the number of tops or lows that connect to form these lines, the more enforceable the lines are and so are more likely to repeat in the future.
So how do trend lines work when it comes to your trading?
After you have spotted a trend line then it can be projected so that it can be used for prices in the future. This trend line now becomes a future support or resistance area which is a probable area for a u-turn.
The reliability of a trend line for predicting future price movements is dependent on things like the number of points it has hit previously. Another parameter to consider is if there are any combination of indicators at the same place supporting the trend line?
Different indicators that can help here include Japanese Candlestick formations, relative strength and momentum indicators, support and resistance areas, round numbers, and moving averages. Another important aspect is to examine higher timeframes to see if other trend lines are occurring in the same place and so reinforce the existing trend change. All of these examples provide supporting evidence that something is about to happen.
When price approaches a trend line, one of two things can happen. Either it can recoil off the line and go back the other way, or it can break through the line. We are never certain either way and as traders we must be prepared for both possibilities. Sometimes the price might break through the line and shift track. This happens when price breaks through a trend for 2-3 days and then suddenly retreats and continues in the original direction.
Finding unions will help to eliminate the chances of false breakouts. When you are trading these moves it is sensible to use a tight stop loss strategy to ensure you lessen any potential losses. If there is a breakout from the track then there is a high probability that a new trend will begin along in a new direction. Remember that a new direction is confirmed when a line can touch three or more highs or lows. Two points is not reliable enough to confirm a new trend.
How do you make profits from trends?
If a trend has been determined then you wait until price approaches the trend line again in the future. If there is a combination of other indicators at the same time, then you can open a position in the direction of the possible reversal with a stop above where you think the turning point will occur. Don't place this order until the reversal has happened. The setting of the stop loss must fit within your risk management plan.
Now if the price ignores the tend line and breaks through with great strength then a change in the original trend would have occurred. So now the trader opens a position in the direction of the new trend and sets their stop loss just behind the proceeding trend line. The stop loss should also fit within your risk management plan.
Conclusion.
Trend lines are very important signs of where a market may be heading next. Project these lines into the future and use them as possible future support and resistance points. If they are located in conjunction with other indicators supporting the same change in direction or supporting the current direction then open a trade and take advantage of these movements.