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.
A trend line depicts the points of support and resistance for the price, depending on the direction of the market. 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 investors to determine these resistance and support levels.
Trend line is a straight line that connects two or more price points and then extends into the future to act as a level of support or resistance. There are two types: upward and downward. It is an aspect of Forex technical analysis that uses line studies to try and predict where the next move will head to. A trader must know how to draw and interpret signals generated by this tool.
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 - up or down.
- The strength of the current move- and
- Where future support and resistance will be likely located
If lines forms in a certain direction then market usually moves in that direction for a period of time until a time when it is broken.
Plotting these on a currency chart shows the general trend of the market which can either be upward or downward.
Below is an example of how to plot these on charts
Tutorial: How to Draw and Trade Upward Move
Tutorial: How to Draw and Trade Downward Move
The MetaTrader 4 software provides charting tools for drawing these on currency charts. To plot them onto a chart, investors can use the tool provided on the MetaTrader 4 software that is shown below.
To plot on this on a chart just click the 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 your Forex 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 investors because you should never go against it. This is the most reliable method to trade Forex because once currencies start to move in one direction they can move in that particular direction for quite some time - therefore using this method presents opportunity to make profits from the Foreign exchange market.
Principles of How to Draw
Use candlestick charts
- The points used to draw are along the lows of the price bars in a rising market. An upward bullish 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 bullish move is defined by lower highs and lower lows.
- The points used to plot are extremes points - the high or the low price. These extremes are important because a close beyond the extreme tells investors the trend of the currency pair might be changing. This is an entry or an exit signal.
- The more often a line is hit but not broken, the more powerful its signal.
There are two main ways of trading this setup:
- The Bounce
- The Break
Technical Analysis Methods
The bounce is a continuation signal where price bounces off this line to continue moving in the same direction. In a downward move, the market will bounce downwards after hitting this level which is the resistance level. In an upward move, the market will bounce upwards after hitting this level which is the support level.
The break is a reversal signal where the market goes through the line and starts moving in the opposite direction. When an uptrend is broken then the sentiment of the market reverses and becomes bearish and when a downtrend is broken then the sentiment reverses and becomes bullish.
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:
This method 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 investors to place entry trades after price has retraced. Trades are setup along these levels and a stop loss placed just above or below.
The trend line break is a crucial indicator of possible Forex reversal. When a the its broken the price starts move in the opposite direction. This provides an early exit signal for investors to exit their open trades and take profits. When there a penetration of these levels, it is a signal that the price can start moving in the opposite direction.
Unlike other technical analysis indicators there is no formula used to calculate a it, this formation is just drawn between two chart points.