Even if you are new to forex, you will probably have heard the old adage “The Trend is Your Friend”. And we’re not talking about the latest fashion, but the usefulness of pricing going in a steady direction.
Of course, it all depends on you time scale- you can have a yearly trend, a monthly trend, and an hourly trend- it depends on your timeframe for trading, but suffice to say, if you trade with a trend, you are going to make some profit if you do it right.
But the first thing to do is to spot a forex trend, right? That’s not as easy as it looks.
OK- let’s talk forex charts, because that’s where you’ll be spotting trends. Trend lines are the most used form of technical analysis.
Drawing Correct Trends.
It’s best to have a chart in front of you at this point, by the way.
A currency trending up is spotted by connecting the lower points of easy to spot supports (valleys)- where the chart comes down and reverses in other words. And if the market is heading down, you map out the trand by connecting the tops, the points of resistance, or the peaks.
To draw trend lines correctly, all you need to do is identify two major tops or bottoms and draw a line between them.
It’s really not that difficult!
Types of trends:
You have 3 types of trends basically:
Uptrend (lows getting higher and higher, connect the lows)
Downtrend (highs getting lower and lower, connect the highs)
Trend Line Tips
- You can use 2 points to draw a trend but you need 3 to confirm it
- The more aggressive the price action, the more volatile the market, and the less accurate will be your trend line. Similarly, the longer a trend line, the more reliable it is (but careful, it’s going to turn some time- keep an eye on the fundamentals).
- The more you test trends with successful trades, the more confident you can be about them.
The best way to get familiar with trend lines? Draw some! And test them out. Get yourself some graph paper and plot them out (or print off some charts. There is no substitute for practice. Get charting!