One of the most commonly used Technical analysis indicator in Forex is the Trend lines. They are easy to use and give you a great understanding of the price trend of a given currency. If you manage to build the trend lines properly, then they will form a channel and the price will move inside this channel. The trend channel is formed from two lines: the upper line is call “resistance” and the bottom line is called “support”. This is all made possible by the currency’s price movement data from previous periods. Notice that the Trend lines are used by both professionals and beginners in Forex, because the indicator is both easy to use and great in picking up the movement of the price. Before, we move on, let’s talk about the chart you are using. We strongly recommend the candlestick chart, because it gives you all the necessary information.
Obviously, if you want to build reliable trend lines, you have to recognize the trend itself first. Now, identifying the trend can vary depending on your trading strategy and account balance; for example, traders that have small account balance prefer hourly or ever four-hour trading, because they cannot afford to lose too much money, while waiting for the desired price movement. However we recommend using the daily chart as a starting position for your major trend, here you will create the important support and resistance lines. Once you have identified the major trend, then you can move on to the one-hour or four-hour chart, where you can add more precise trends and catch some price movements.
In order to build the first trend lines, you have to pick up at least two tops and two bottoms; these are the highest and the lowest closing positions from a time period of your choice (for example, six months). However, we recommend using three or more tops and bottoms, because this way your trend will be much more solid. Most beginner traders make their trend channel too steep, which is a common mistake; after all this is the major trend. When you have picked your tops (for example), draw a line to connect them and then hold the control key and drag another line to connect the bottoms. Remember that building parallel lines is crucial.
There three types of tops and bottoms that you can use:
So, you have successfully built the trend lines and you know that the price movement will remain inside the channel, but what if the price breaks the channel? This will happen at some point and you have to know how to interpret it. It is quite simple actually, if the price breaks a support line, then it is going to continue falling and vice versa. However keep in mind the price might close below the support line, but it might not break it; if the price doesn’t break the line, it will continue its movement inside the channel. In order to confirm a break, you should have multiple candles closed below the support line. When support line is broken, it transforms into a resistance line, so you should build a new support. Notice that this rule isn`t bullet-proof. The experienced Forex traders use multiple indicators to predict, confirm and double-confirm the price’s movement.
If you find yourself in a situation, where there are two or more equal tops and bottoms, then you can create a horizontal channel. This is a very interesting situation, because this means that the market is literally sleeping and no movement is expected or is it? A horizontal channel is most often followed by a strong price impulse that is either upwards or downwards. The key here is to recognize when the impulse is going to take place and in which direction. You have to use multiple indicators to confirm, but the strongest sign is when the price passes a trend line and a couple other levels (for example, fractals).Moving Average - MA Commodity Channel Index - CCI Parabolic SAR
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