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March 17, 2016

Trend Line, A Basic Analysis

Trend Line, A Basic Analysis

The decision to buy or sell should go according to the ongoing trend most of the time. Why does it matter? Placing a buy order in a bearish trend would be dangerously risky as it would be more likely to hit the stop loss than when the trend is followed.

Does taking benefit of the trend gives consistent profits? Trend has become the very foundation of decision making. To gain the optimal profit in forex trade, other analyzing tools would be needed. However, before building a trading system, analyzing the trend becomes an important matter, for system without understanding the trend would be just like blind people not knowing where to go.

How is the trend formed? There are several ways to form it. First, it is by using the line tool provided on MetaTrader4 platform or charting websites such as tradingview.com.

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A price will form waves (red lines) which are highs and lows. If higher highs and higher lows are continuously formed, it is called Bullish trend. In order to form a trend line when bullish occurs, a line that connects lows and higher lows should be drawn (blue lines). If you want to give it a try, you can go to www.tradingviews.com, pick any pair you desire (such as EURUSD) and a chart would come out.

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Tools above could be used to form a trend and help us to recognize if it is in a bullish, bearish, or sideways trend. Afterwards, the highs, lows, higher highs, and higher lows could be decided. After deciding the points, lows and higher lows should be connected for bullish trend or highs and lower highs for bearish trend. When bullish trend occurs, the formed trend is below the price and it is called the support. On the other hand, when bearish trend takes place, the trend line would be above the price which is called the resistance.

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As in the example above, the trend line is connecting the low and the higher low.in many occasions, the price was heading to the trend line before reversing to keep on going along with the trend. Trend line is a psychological line that is widely used by traders to decide which price level they would open a position on. In the example above, if we place a buy order on the trend line, there is a possibility that the price would rebound. It shows that forming a trend line would not only help us to gain profit, but to mitigate the risk as well.

Not only the trend line, there are also other indicators we could utilize to recognize a trend. One of them is the Moving Average (MA). MA is an indicator in which the average price of a certain period is shown. For example, MA 10 shows the average price of the last ten days.

How does MA become a trend? As an illustration, let us say that the last ten days average price is 1.1340 and the current price is 1.1240. It means that the current price of the currency pair is being traded below average price that was traded ten days earlier. Such condition suggests that the pair is in a bearish trend which means that if the price hits the MA 10, there is a huge possibility that the price would rebound and be back on its track of declining. Similar to trend line, MA could also be utilized as the support or resistance of the price movement. It can be seen that the MA could function as the support or resistance, being an alternative to form a trend line.

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After understanding the utilization of trend, the other important thing to learn is the waves. Waves are the price movements that form a trend. Waves become important because identifying waves is needed to recognize a trend precisely. Waves could be decided by identifying the forming of new high and low.

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The capability of recognizing waves would bring us a precise trend line. In terms of utilizing MA, waves are not usually detected in the short period MA most of the time. It would require a longer period MA in order to avoid the waves trap (Tail whip).

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3 TYPES OF TRENDLINE

There are three types of trend line. They are the uptrend (Bullish), the downtrend (Bearish), and Sideways. In the Bullish trend, the low and the higher low should be connected, while in the Bearish trend, the high is connected with the lower high. On the other hand, in the Sideways, a channel in which the price remains inside the channel without penetrating the highs and lows could be seen.

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Now that you have learned what trend line is and how to draw it, what else are you waiting for? Try to draw a trend line on any charting platform you like and share it here with us for a further discussion.

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