Trend lines are fairly graphic representations of the behavior of Forex prices that guide the decisions of Forex traders to buy, sell or even issue a stop order in the trade. Rooted in the theory of Dow, market prices always indicate a “trend” after discounting several factors, such as the political environment that affects it. Therefore, trend line analysis only studies the behavior of the price based on this presumption.
Price movements exhibit 3 different trends, that is, upward trend, downward trend and an investment trend.
An ascending trend line can be drawn next to two successive price lows and can be validated as a price trend if more than 2 successive lower lows can be joined with a straight line. In simple words, the trend line will always be drawn below the geometric patterns displayed by the price movements in a trading chart.
Fig. 1 Fig. 2
Upward trend Figure Downward trend
Similarly, a descending trend line can be drawn next to two and more consecutive highs of the price movement. Here, the trend line will be drawn above the geometric patterns exhibited by the price movements that connect each high price. (Ref. Fig.2). When a particular trend line breaks in a new direction, it indicates a trend reversal. (Ref. Fig. 3). In a nutshell, in the figure below, an ascending trend line will revert at the time the price behavior pattern is below the trend line (see the green box). However, a trend reversal is not always necessarily an indication of the trend line when it simply traverses a price pattern (blue note).
Investment of trends
In addition, in certain cases, the market price shows a lateral trend, that is, when the price does not tend to rise or fall, which results in geographic patterns being channeled into a horizontal line.
Support and resistance in a trend line.
In the case of an upward trend, the trend line will indicate a support force due to the increase in demand, while even prices increase, stimulated by the preceding behavior of market prices. Each successive upward movement of the trend line acts as a support to the point where the trend line breaks, which is when the market price becomes resistance. At the moment in which the trend line shows a downward trend, it triggers the massive sale of the underlying currency pair and the increase in supply makes the market bearish.
Trend lines help traders decide, time and execute their trades, while minimizing risks if they are correctly classified. The ideal is for a trader to buy at the time of a fall in prices during an upward trend, that is, when prices touch the trend line and get involved in the sale when the patterns of price movement increase in a trend downwards The analysis of the trend line is also fundamental to identify and plan the points of entry or exit in a particular trade by making estimates calculated around the price action exhibited in and around the trend line.
However, the analysis of the trend line suffers from the point of view of time, since an operator must be able to assimilate the trends of movement of immediate prices, in the medium and long term in order to make a justifiably precise commercial decision. A price chart per day may indicate a different price action trend to a daily or even weekly price action chart. However, in practice it has been observed that taking into account immediate and medium-term trends allows traders to choose the correct action. The analysis of trend lines has become a necessity in technical and currency analysis for obvious reasons. However, experienced traders are gradually tuned to undertake the analysis of the trend line instinctively in their mind by simply looking at a price chart.
In summary, trend lines are a great way to take a “macro” look at the general direction of a forex contract. They are relatively simple to draw and interpret, and are used relatively frequently by traders and experts alike. The use of trend lines is also compatible with the use of supports and resistances.