Saturday, 11 May 2013

Forex Tutorials Part 4 - Trend Lines And Channels

Trend lines is one of the most useful tool to use to determine where the market is going. An upward sloping trend line is plotted along the valleys of the chart, and a downward sloping trend line is drawn along the peak of the chart. There are 3 different kinds of trend lines you can plot:
  1. Uptrend (upward sloping trend line)
  2. Downtrend (downward sloping trend line)
  3. Sideway Trends (series of up and down along a certain support and resistance level)
A figure is always useful, so take a look at the figure below to see how a trend line can be drawn:

As you can see, a downtrend is drawn along the peak of the chart while an uptrend is drawn along the valley of the chart. Drawing trend lines is one of the most simple and useful tool yet one has to be aware of certain risks involved with determining the market trend:
  • It is recommended for at least 3 valleys or peaks to be reached before drawing a trend line
  • The steeper your trend line, the most likely the market is going to move in a direction contrary to your plotted trend line, consider the market as a marathon runner who cannot keep running at full speed
  • Trend lines become stronger the more times you test it, just like how support and resistance levels are determined
  • Most importantly, fit the trend line to the market. Do not fit the market to the trend line. If they aren't compatible, they are not  

A channel is an upgrade from the trend line in technical analysis. Both the tops and bottoms of channel can be used to represent potential areas of support or resistance. As usual, here is an illustration for your understanding:

There are 3 types of channel like the trend lines:
  1. Ascending Channel
  2. Descending Channel
  3. Horizontal Channel
You create a channel by doing a parallel shift at the exact same angle for an up and down trend line. One way you can use a channel to trade is to buy when prices near the bottom channel and sell when prices near the top channel. Do take note in using the Same Channel to trade if you follow this trading method as it just does not makes sense to determine a buy sell point with 2 different channels. Remember, the golden rule applies: Fit the channels to the market, not the market to the channels.
Next lesson, we will touch on our first lesson on how to trade using trend lines and channels. This is something I am already unconsciously doing and you will learn how as well.

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