How To Draw Trend Lines and Channels on Forex Charts
Sometimes support and resistances are formed diagonally in a similar way like a staircase. This forms a Forex trend which is a sustained movement in one direction either upwards or downwards.
This is one of the learn technical analysis lesson among the many technical analysis tutorials on this website where you will learn how to draw these lines, interpret their signals and how to use these type of technical analysis on currency charts.
A trend line depicts the points of support and resistance for the price, depending on the direction of the price. For an upward moving market it will shows the points of support and for a downward moving market it will show the areas of resistance and they are mainly used by many traders to determine these resistance and support levels.
Trend line is an aspect of Forex technical analysis that uses technical analysis studies to try and predict where price will move next. A trader must know how to draw a them: the trend line definition is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. There are two types: upward and downward.
The basis of this analysis is based upon the idea that markets move in trends. They are used to show three things.
- The general direction of the price movement up or down.
- The strength of the current price movement and
- Where future support and resistance of the current price movement are likely to be located.
If a trend line forms in a certain direction then price usually move in that direction for a period of time until a time when the trend is broken.
If price of a currency is moving up then a upward trend line is formed that is also moving up.
If price of a currency is moving down then a downward trend line is formed that also moves down.
Drawing one of these on a Forex chart shows the general direction of the price move. The direction can either be upward or downward.
Below is an example of how to draw these on Forex charts
Tutorial: How to Draw and Trade Upward Trend Line
The MetaTrader 4 Trading software provides charting tools for drawing trend lines on currency charts. To draw them onto a chart, traders can use the tool provided on the MetaTrader 4 software that is shown below to draw.
Drawing on Forex chart - MetaTrader 4 Software Platform Charts Drawing Tool
To draw on the Forex chart just click the trend line drawing tool above on the MetaTrader 4 technical analysis software and select point A where you want to start drawing and then point B where you want the it to touch. You can also right click on the trend-line and on the properties option select the option to extend its ray by ticking the "ray check box", if you do not want to extend it, then uncheck this option in you trading platform. You can also change other properties such as color and width on this property pop up window of the properties. You can download MetaTrader 4 software and learn technical analysis with it.
The trend is your friend. Is a popular saying among currency traders because you should never go against it. This is the most reliable method to trade Forex because once currencies start to move in trends they can move in that particular direction for quite some time. Thus trading with such a method presents opportunity to make profits from the Foreign exchange market. This makes this trading method one of the popular trading strategy to a trader.
Principles of How to Draw
Use Forex Candlestick Charts, to draw
- The points used to draw are along the lows of the price bars in a rising market. An upward market move is defined by higher highs and higher lows.
- The points used to draw are along the highs of the price bars in a falling market. A downward market move is defined by lower highs and lower lows.
- The points used to draw are extremes of the price bars. This is the high or the low price. These extremes are important because a close beyond the extreme tells traders the direction of the market might be changing. This is an entry or an exit signal.
- The more often a line is hit by price extremes, but not broken, the more powerful its signal.
There are two main ways of trading this setup:
- The Bounce
- The Break
Technical Analysis Methods
Trend line bounce is a continuation signal where price bounces off this line to continue moving in the same direction. In a downward market move, prices will bounce downwards after hitting the downwards line which is the resistance level. In an upward market move, the prices will bounce upwards after hitting the upward line which is the support level.
Trend line break is a reversal signal where the price goes through the line and starts moving in the opposite direction. When an uptrend is broken then the direction of the market reverses and becomes a bearish market and when a downtrend is broken then the direction of the market reverses and becomes a bullish market.
For very strong trends, after this break signal, the price will consolidate for some time before moving in the opposite direction. For short term trends then this break signal will mean price may reverse immediately.
In currency, both the bounce and the the breaks that are used in technical analysis charts are based upon these levels being support and resistance.
Entry, Exit and Setting stops:
These trend lines are used to determine good entry and exit points, protective stops are placed just below them. The bounce is a low-risk entry method used by traders to place entry trades after price has retraced. Traders will set up trades along this line and put a stop loss just above or below this it.
The trend line break is a crucial indicator of possible Forex reversal. When a the its broken the market price starts move in the opposite direction. This provides an early exit signal which most traders use trend lines to exit their open trades and take profits. When the line is penetrated, it is a signal that the price can start moving in the opposite direction.
These type of technical analysis method can also be combined with other technical indicators such as Fibonacci indicator to form trading systems and Forex strategies to signals.
Unlike other technical analysis indicators there is no formula used to calculate a it, this formation is just drawn between two chart points.
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