A trend line in the forex market is a line connecting troughs to form support (uptrend) or a line connecting tops to form resistance (downtrend). These lines will show the current trend line and forecast when the trend will change. In addition, trendlines also act as support and resistance zones, providing traders with information to open or close a trade within a trade.
In fact, the concept of a trend line is often blurred, traders give many different opinions and there is no consensus. Distinguishing trend lines will help traders apply suitable Forex trading plans, thereby limiting risks and improving profits.
Some traders often draw the wrong trendline or try to match the market movements instead of in the opposite direction.
To draw trend lines in the forex market correctly, all a trader should do is locate two tops or bottoms and bring them closer together.
Types of trend lines
There are three types:
Uptrend (higher than low): An uptrend means the following high is higher than the previous high and the latter is higher than the previous low. This is the time to buy and wait for the price to rise.
Downtrend (lower high): Downtrend i.e. the following high is lower than the previous high and the trough is lower than the previous high. This is the time to sell quickly with the expectation that the price will fall back, buy back to make a profit.
Horizontal (oscillating): a sideways trend is a trend in which the price will fluctuate within a specified range, the rear peak is equal to the front high and the bottom is equal to the front bottom. Usually at this stage investors will not participate, in case if they buy, they will buy at the bottom and sell at the old high.
At least two peaks or troughs are required to draw a valid trendline, but three points are required to confirm it. The steeper the trend line, the less reliable it is and the more likely it is to be broken. Like horizontal support and resistance levels, trend lines become stronger the more times they are tested. And most importantly, NEVER draw trend lines by forcing them to fit the market.
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