Trend theory: types of Forex trends.
Market trends seem to follow geometric patterns as they go through both low and high trends. An uptrend creates a series of trends that have higher lows and highs. A trend line drawn between the rising lows can often be fairly accurate in determining where the market can find greater support during the next low trend and indicate fairly good buying levels.
Many Forex traders will choose an area below the trend line at which stop orders are are placed resulting in a sharp sell off. New sellers are generally attracted by breaks below the uptrend line. It's quite normal to see a series of lower lows and lower highs during a downward trend in the market. In this case, the trend line is drawn in alignment with the descending highs and will mirror the analysis as described above.
Every possible piece of information that is known is included in the price of a security, for this reason technical analysis will hold up. This information removes the necessity to analyze the political, economic and fundamental factors that have a big influence on price. Since all of the information that is available is already factored into the current price, the price movement is all that needs to be analyzed. The tendency for prices to trend isn't guaranteed; therefore any analysis should rely on common sense and empirical evidence. The fact that prices do trend is supported by the time proven Dow Theory.
For example, if homeowners have some reason to believe that Forex interest rates will increase and depreciate the value of their homes, they will be more likely to consider selling. Three similar homes in the same area could be sold at various prices. This would be much more preferable to dropping the prices of the homes down to low simply based on interest rates. Prices will tend to move more consistently over a period of time, but in the same direction.
With numerous participants in a large market such as global equities, prices often tend to move from high to low in one direction. But, prices will continue on a downward slope until a balance is reached between buyers and sellers. Sometimes this slope is gradual and sometimes it can happen really quick, but it's what a technical analyst tries to identify and exploit. When this trend is identified, a house may be sold short because the trend is getting lower. Price trends are one of the major concepts that give value to a technical analysis. If someone disagrees with the Dow Theory, they will usually disagree with a technical analysis as well. A technical analyst theorizes that all investors display the same type of behavior. There are the repeating attitudes that "Everyone wants in on the next Microsoft", "Stock in a company with a new technological invention will sky rocket". While this might be an irrational theory, it does still exist. A technical analyst will even create a chart showing patterns of price movements are predictive qualities.
Since their primary concern is price trends, they are interested in anything that can influence prices. Some even monitor the enthusiasm that investors display with surveys. These surveys are used to attempt to determine the attitudes the investment community has and whether they're going to be bullish about the investment or eager.
They also gather information from surveys to help determine if a particular trend will reverse and whether new trends are about to develop. Extreme reactions from investors can alter the outcome of a technical analysis. If most of the investors surveyed are bullish, it's a good indicator that there are very few buyers remaining in the market place. If investors appear to be long, there are generally more sellers than buyers and indicates the market is trending down. This concept is referred to as contrarian trading.
Forex Trend Lines.
Know how to draw a trend line.
Advantages of using trend lines in Forex trading.
Forex Trend Lines.
Plotting a trend line on a Forex chart gives very valuable information.
Not only the trend line will show a current trend (direction) of the price move, it will also depict points of support and resistance levels for market price.
In addition, it will also help to determine good entry and exit points, best positioning for profit taking and placing protective stops.
This very simple, but yet quite powerful tool will be one of the crucial indicators of possible trend reversal (when market price starts move in the opposite direction).
So, shall we learn how to draw trend line to make it our good friend in profitable forex trading?
In the uptrend, Forex trend line is drawn through the lowest swing-points of the price move.
Connecting at least two «lowest lows» will create a trend line.
In the down trend, trend line is drawn through the highest swing-points of the price move.
Connecting at least two «highest highs» will create a trend line.
Keep in mind that same charts may show slightly different "highs" and "lows" if you try to compare different Forex brokers. This can be explained by the fact Forex quotes often vary from broker to broker (it's a small difference, yet often clearly noticeable when it comes to drawing trend lines).
A trend line confirms its validity when the price respects this line. The more «lowest lows» / «highest highs» the trend line contains, the stronger it becomes.
Another sample of drawing trend lines: main and inner downtrend lines.
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Introduction to Basic Trendline Analysis.
Short term trading and intraday technical levels.
- Part 1: How to identity, construct and utilize basic trendlines.
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In this series we will piece together the anatomy of a swing trade and discuss the tools along with the methodology used to construct a basic trade setup. While no one single strategy is perfect, these best practices can be utilized in conjunction with your own trading strategy to identify more favorable entry / exit points in trending market environments.
Trendlines are the simplest and single most important (and largely underutilized) tool in your trading arsenal. Extending a line off key highs & lows in price is an objective way of assessing the gradient or slope of a trending market. This key step can help identify where the price is likely to find support (floor) or resistance (ceiling).
Note that trendline analysis can be viewed as more of an art form than a science as it requires some form of subjectivity. That said, when drawing trendlines, the more touch points the market has, the stronger conviction the slope offers. This means that the reaction off the trendline (slope) becomes increasingly effective.
In the example of the U. S. Dollar Index, the positive slope casts a bullish outlook, with the broad game plan to buy as price trends higher. So where should our entry point be? A pullback into trendline support would be the most favorable entry.
With the same respect, a break often offers sharper and more significant reversals. Once a trendline support is broken, the slope now becomes resistance for prices, and often foreshadows a change in market behavior. This slope can now be seen as a reference of invalidation for the current move lower.
Likewise, a breach above a trendline resistance sees that line as support for the subsequent move higher. The AUD/NZD example above shows how a single trendline can offer plays on both sides of the spectrum as support & resistance. Once the slope broke in December, if offered clear resistance on the subsequent rally in early 2015 before moving lower. Likewise, the breach above in June fueled a rally higher, which inevitably found support back at that same trendline.
A Few Key Notes.
Some important aspects to keep in mind when drawing trendlines:
Two points is speculative, three points confirms - It’s important to note that any two reference points can offer a trendline - however it’s the third touch point that confirms the validity of the slope. Therefore before relying too heavily on a given gradient, look for that third touchpoint for conviction. Assessing the br eak - You should always be trading under the assumption the trendline will hold - but when trying to ascertain whether price is actually breaking, one of the most important things to consider is timeframe. As a rule of thumb, I’ll typically look for a daily close to confirm or invalidate the break of a given trendline. However, when utilizing shorter time-frames price action will be the biggest tell - look for a reaction / change in behavior at the break with a pullback & retest of the slope as support/resistance to validate the break. We will discuss multi-timeframe analysis in more detail in part 3 of this series. A break of a trendline should fuel acceleration - When a slope is broken as resistance or support, the subsequent move should see prices follow through in the direction of the break. If prices break and fail to accelerate in that direction, often times this will be a sign of a ‘false break’ scenario (also known as a ‘throw-over’). These exhaustion trades are typical in mature trends and can often precede key reversals in price. Don’t chase the break - The way you will want to trade the breach of a trendline is to wait for a pullback in price to test the slope as support – your stop will be below this low. Likewise, on a break of support, wait for the market to retest the trendline as resistance - That pivot high will be your stop on the short.
This fundamental use of trendlines is constant across slope analysis and is the basis of the methodology. In part 2 we’ll discuss how parallels of these trendlines and pitchfork formations can be used to identify favorable targets (areas of support / resistance) within the context of a given trend.
---Written by Michael Boutros, Currency Strategist with DailyFX.
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Forex Trend: Trend Lines in Technical Analysis.
One of the basic concepts of technical analysis is the trend. It is based on assumption that market participants make decisions in herds making asset price movements sustainable for some time.
Depending on the prevailing direction of prices an asset may be in an upward trend, in a downward trend, in a sideways trend or have no apparent trend.
An upward trend is characterized by prices going to higher local highs and higher local lows. An upward trendline connecting the lows acquires positive slope. A downward trend is characterized by prices making lower local highs and lower local lows. A downward line connecting the highs acquires negative slope. A sideways trend is drawn by two horizontal trendlines which prevent prices from large upward or downward movements, keeping fluctuations in a certain range.
Interpretation.
An upward trend suggests that forces of demand are greater than forces of supply making investors to pay higher and higher prices for the same asset. However a break below the trendline (plus certain deviation is widely common) may be a sign of trend weakness and be considered a sell signal. A downward trend suggests that supply is overwhelming demand as sellers agree to accept lower and lower prices for the same asset. The downtrend is expected to continue until prices break above the trendline (plus certain deviation is widely common), sending a buy signal. A sideways trend indicates relative balance between demand and supply forces and the price is expected to stay inside the range indicated by the trendlines until one of them is broken.
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