Understanding the course of underlying trends increases the probability of success in the forex market, as it helps to determine whether the general market forces are favorable. Trend lines are simple lines that connect a series of currency prices, helping to get an idea of where the investment is headed. Downward sloping trend lines are indicative of excess supply of a specific currency in the market. This is an indication that traders are more willing to sell that currency. Conversely, an uptrend signals a higher demand, which suggests that the currency price is likely to head upwards for a while.
Using Trend Lines Forex to Draw Support and Resistance Levels
Trend lines in forex are extremely resourceful in predicting areas of support and resistance, which are price levels on a forex chart beyond which the currency price will cease to rise or fall. When a currency pair’s price nears a support or resistance level, one of the following scenarios occurs:
- The price bounces off the trend line and continues in the course of the prior trend.
- The price moves through the trend line, which indicates that the current trend is weakening or reversing.
This information may be used by traders to look for strategic entry levels as well as to manage risk by spotting price levels to place stop loss orders.
Tips for Drawing Trend Lines Forex
The most important consideration while drawing trend lines in forex are choosing the right price. An investor can choose from open, close, high, and low prices. There is, however, no such thing as the best price, and it is entirely subjective. Besides, a trader can also choose to either stick to one price or choose a mix of prices while drawing trend lines.
In general, upward-sloping trend lines are used for connecting prices that act as support, generally drawn with a series of period lows or closes. A downward-sloping trend line is typically used to connect a series of either period highs or closing prices, which act as resistance when a currency pair is trending downward. It must be noted that two trend lines can be drawn simultaneously on a chart.