Simple and Effective Forex Trend Lines

Forex trading is complicated, but there are strategies that can help you make sense of it. A very simple, yet effective, technique uses trend lines. With these, you can better time your trades.

Trend lines are very basic and easy to use. They simply follow ups and downs in the market, which can help you discern patterns. Timing is essential to successful trades, and trend lines may help you determine when to buy or sell.

Since the 18th century, candlestick charts have been used to follow and even predict markets. With one, you can chart trend lines and determine what the market will do.

A trend line is made by charting both highs and lows. When the market is going up, a line is drawn up from the highest point. A corresponding parallel line is drawn down from the lowest point. The resulting channel indicates where prices are rising.

To chart down days, you simply chart the lowest point with a line and a corresponding parallel line through the highest point. This is called a “descending channel” and tells you where prices are falling.

When the market is making neither huge losses nor gains, your channel will be horizontal. Using the trend lines, you can then extrapolate patterns and make trades based on this information.

How does a trader use this information for Forex trading? It is ideal for traders who hold currencies very briefly. As the price of a currency fluctuates throughout the day, traders keep an eye on the upper and lower points. When a price hits the top of the channel, many will sell because it is likely the price will go back down. Likewise with buying: when the price hits the bottom of the channel, it may be a good time to buy as the price will likely go back up according to the trend.

During a trend, prices typically don’t rise above the resistance line, or top line, or fall below the support line, or bottom line.

If it were that easy, everyone could predict the market. Being able to predict when trends will reverse is difficult, so some traders use general guidelines. For instance, they only sell when a currency’s price moves beyond the resistance line on an upward trend. When it moves above the resistance line on a downward trend, many will not sell because it seems to indicate a reversal in the trend.

You can also use the trend lines even during stable market trends. If you have tracked prices during several down periods and are now seeing a stable trend, it could indicate that the next trend will be toward higher prices. Before putting any theory in action, it is best to test them and see if they play out according to your predictions.

Develop and test theories using a demo account or use real-time prices so you can get a feel for trading without involving actual money. Once you’ve used trend lines or other techniques with good long-term results, you are far better prepared to invest in the Forex market.