Forex TrendlinesForex Trendlines was probably the first indicator used by traders in the West. Trendlines are still very useful, but be careful when drawing them. Use lowest lows for uptrends and highest highs for downtrends. I have found that it is helpful to draw Trendlines in several different time frames, eg 15 min, 120 min and daily. In this way you get the big picture of your currency pairs short, intermediate and long term trend. Forex Trendlines are not exact – it is not uncommon that price punches through the Forex trendline only to reverse and continue the previous trend (this is called a false breakout). This is just one way the market weeds out the weak and rewards the strong.  Another thing to keep in mind is the tendency for Forex trendlines to be broken and then resuming its previous trend, tracing the old trendline on the other side. It is not uncommon that 2 or 3 trendlines originating from the same high or low to be broken before price changes trend direction. Also price usually tend to break a Forex trendline and then retrace back to the trendline before it resumes a new trend, effectively giving you a second chance to enter.
If you have access to tick volume, it can be very helpful in identifying potential breakouts. If a Forex trendline is about to hold, then price, as it moves towards the trendline, will be accompanied by low and/or decreasing volume. A breakout, on the other hand, is usually associated with high volume and/or increasing volume as price hits the trendline. Volume (energy) is needed to facilitate a break. If prices are not trending, either up or down, we are in a trading range. If this is the case we draw horizontal trendlines, identifying support or resistance.
Another useful application of trendlines are crossovers. These occur when several trendlines (at least two) cross over or meet at a point. The more trendlines that cross over each other, the more significant the point is. Crossovers can be seen as focal points, where price will gather before it takes off in the same or different direction. Another variation of the Forex trendline is the trend channel. It is common to use a linear regression channel to plot this on the chart. Most charting platforms have this ability.
Go to the next part, Forex Moving Averages. Return from Forex Trendlines to Technical Analysis
|
