$50
3 pips
$50
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Drawing trend lines requires a technical analyst to first visually identify that a trend or directional movement exists or is in the process of forming. They do this by first making forex graphs that plot the exchange rate’s progress over time for a certain currency pair and watching how the rate has progressed over time. They then look for the exchange rate to make a series of higher highs and lows, when engaged in an upwards trend, or a series of lower lows and highs, when proceeding in a downwards trend.
By correctly identifying trends as they occur on charts, an experienced technical analyst can often use that information to assist them in forecasting future exchange rates for that particular currency pair. Not only can trends give technical analysts a valuable glimpse into the future, but such helpful chart patterns can also provide objective trading opportunities when they set up so-called “measuring objectives.”
Advantages of Trading Trends
One of the primary advantages of looking for trends on exchange rate charts arises from their tendency to point to the future direction of the market. Naturally, this provides a very useful piece of information from which forex traders can readily profit.
As the old market saying goes, “The trend is your friend,” and many traders take this advice to heart by looking to position themselves to benefit from a continuation in the trend. If the trend heads higher, trend-following traders look to buy on dips, if the trend declines, they look to sell rallies.
Drawing Trend Lines
In general, correctly drawing trend lines usually means connecting two or more of the major highs seen on a forex graph with an upper line in the case of a downtrend, and two or more of the major lows with a lower line in the case of an upwards trend. Market trends can be readily identified using this technique and then watched as the market progresses by drawing trend lines on real time charts and then saving them for later retrieval.
Trend Channels
Furthermore, sometimes both upper and lower trend lines can be drawn around price action in the same direction that appear to parallel each other approximately. In this case, they together form an important chart pattern called a channel that tends to contain the exchange rate movements while the market remains within that trend
This chart pattern provides a trading opportunity where forex traders will often look to buy when the market approaches the lower line of the channel, with their stops just below that line. Similarly, they will also look to sell when the market trades toward the upper channel line, and they will usually set their stops just above that line.
The End of the Trend
Furthermore, once the exchange rate breaks either a well-established single trend line or a channel of parallel trend lines in a direction contrary to the initial trend, that event signals the end of the trend. It therefore pays to keep track of the levels of the major trend lines that fall near the current exchange rate as time progresses in order to know whether that particular trend has finished or remains in play.
In addition, when the exchange rate moves outside a well-established trend channel in a direction contrary to that trend, it generates a channel break signal. Such a signal sets up a “measuring objective,” or an expected market move, that equals the width of the channel projected from the point at which the channel was convincingly broken.
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