Yes, the title says it right; forex trend line is an overlooked strategy. This is because a high precision is required in creating these horizontal support and resistance lines. While trading, it is crucial to analyze the market using trend lines as it is the most accurate way to determine the trend of a currency pair. Not only this, traders also get to know how strong that trend is.
In this first part of the article, we will discuss the basics of Forex trendlines. So, let’s get started….
What is a Forex Trend Line?
The price of a currency pair always keeps on moving up and down to create support and resistance. And using these support and resistance levels, a line is created which is a crucial step for the detection of a trend. This shows an overview whether the price of a particular currency pair is increasing or decreasing. A trend line is of three types:
- Bearish Trend Line
- Bullish Trend Line
- Sideways Trend Line
Bearish Trend Line
A bearish trend line is created when the price of a currency pair keeps on building lower bottoms and lower tops. This trend line is located at the top and is created by joining the resistance points which shows a downward trend. This means the price is going down. Here is the example of a bearish trend:
Bullish Trend Line
A bullish trend line is created when the price of a currency pair keeps on building higher bottoms and higher tops. This trend line is created at the bottom joining the approximate bottoms on the graph. Here is the example of a bullish trend line:
A sideways trend occurs when a currency pair is not showing any of the above trends, and the price remains almost stable with a little oscillation within a narrow range. Here is the example of a sideways trend:
Consider the following candlestick chart:
If you check this chart without the trend lines, it becomes difficult to analyze the period in which the currency pair is acting bullish and in which it is acting bearish. With the trend lines, you can easily make out when to open and close the position in the market.
In the chart, you can see how the trends are changing.
It is not difficult to create the trend lines on a chart. However, it is tricky and requires a lot of precision as just one wrong trend line can make or break the profit opportunity.
To become perfect in creating trend lines, you must have an understanding of the candlestick chart and how a single candlestick is analyzed. You need to understand the body, top of the body, bottom of the body, upper and lower wick of a candlestick. The wicks are analyzed for creating a trendline. However, there are instances when the price of a currency pair spikes up or down due to short-term market volatility. In this case, the trend lines can be created using the candlestick body. Just connect the body of the candlesticks to create a straight line.
Now that you have a clear basic idea about the trend lines, let’s move on to the second part of the article.