Forex trend lines
One of the most important principles of technical analysis is the following: "The trend is your friend".
Finding the prevailing trend will help you become aware of the overall market direction and offer you better visibility--especially when shorter-term movements tend to clutter the picture. Weekly and monthly charts are most ideally suited for identifying that longer-term trend. Once you have found the overall trend, you could select the trend of the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell the rallies during downward trends.
There three main types of trends (depending on trend duration):
- primary
- intermediate
- short-term
Primary trend usually lasts from 1 to 2 years and is a reflection of investors' assessment of internal economic process underlying business cycles. According to statistics, the business cycle from one valley to another lasts approximately for 3-6 years; this means that rising and falling trends last from 1 to 2 years.
Prices are not moving in a straight line, and movements in the main direction are interrupted by a number of reverse movements - reactions. Such trends, which are in phase opposition to the primary trend, are called intermediate (medium-term) price changes. They last from 3 weeks to 6 and more months. Short-term trends, lasting from 1 to 3-4 weeks, interrupt the movement in the direction of the medium-term trend in the same way, as the latter interrupt the movement toward the primary trend. Usually this is a reaction to accidental events, and they are more difficult to reveal than primary and intermediate trends.
Also there is another classification of trends (depending on trend direction):
- Uptrend
- Downtrend
- Flat (Sideways) trend
Up trend: As the trend moves upward, the U.S. dollar is appreciating in value. An Up Trend is defined by a series of higher highs and higher lows.
Down trend: As the trend moves downward, the U.S. dollar is depreciating in value. A Down Trend is defined by a series of lower highs followed by lower lows.
Sideways trend: Prices are moving within a narrow range. (The currencies are neither appreciating or depreciating.) A Sideways Trend is defined by a series of relatively equal highs and lows.
A trendline is a straight line that plots the general direction of a currency in order to help predict future price levels. Connecting the peaks or the troughs within a particular time period makes up the trendline. If the price rises above a downward sloping trendline or drops below a rising up-trend line, the trend is said to be broken. Time intervals could be adjusted according to your preferred trading outlook. Once you have captured the overall trend, you could select the time horizon in which you wish to trade. Thus, you could effectively buy on the dips during rising trends, and sell during the rallies through downward trends.
If the trend lines drawn correctly, they can be as accurate as any other method. Unfortunately, most traders dont draw them correctly or they try to make the line fit the market instead of the other way around.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
Trend lines are drawn by joining the lows (support line) or the peaks (resistance line) of the price data. This helps to clarify existing trends and produces clear exit criteria as the trend has ended when the price breaks through a resistance or support line. The problem with trend lines is that you are only able to draw them once a trend is well established, by which time it is too late to enter a trade.