Technical analysis is a very popular tool with Forex traders. The most commonly used form of technical analysis is trend lines. When correctly drawn, trend lines can be an extremely useful tool for Forex trading. This tool can be used for any currency and with any time frame.
Trend lines should be drawn connecting the highs to the highs and the lows to the lows. It only takes two tops or bottoms to draw a trend line but when you have three you can confirm the trend. When these lines are extended they can be used for predicting the market and as an essential part of your Forex trading strategy. Steeper trend lines are less reliable, and they are more likely to break.
The more times you test a trend line the stronger it becomes. The more points that you use to draw that line, the more reliable you can predict the trend. Most advisors will tell you to use as many connecting points as possible. In order to use the trend lines to help you make trading decisions you want to be as sure as you can that your trend is confirmed.
The most common mistake in drawing trend lines is trying to force them in one direction or another. The trend lines that don’t fit the market aren’t really trend lines. It is most useful to draw trend lines connecting swing highs to swing highs or swing lows to swing lows. Currency prices tend to zig zag. The idea of swing highs and swing lows is to make sure to chart or to connect the peaks with the peaks and the valleys with the valleys.
When a trendline is broken through by a price going below it then it is no longer a valid trend line. A trendline is useful or valid when the prices between the low points do not dip far below the line. Same holds true for high points. When the prices stay along the line without crossing it you can use that line to predict a trend.
Typically, a trader who is using trend lines to form a Forex trading strategy will use entry points and stop losses that are along the lines that he has drawn. It is important to set stop losses especially when you see bounces along the same line that you have drawn because that might mean that many others are using the same strategy as you are and trends can only last so long. When so many traders are making their decisions around the same lines, it influences the market.
The best time to buy is when the market is going up but the price is as close to the trendline as possible. Of course, the reverse is true as well. The best time to sell is when the trendline is going down and the price is at a high along the line.
Trend lines are easy to use with a basic understanding of how to draw them and how they can help you.
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