Trend lines provide a
projection of support and resistance that links past behavior into
the future. A trend line is used to map whether there is consistency
in highs and lows. While simple in its construction, knowing the
trend is a basic foundation for trading forex. Once a trend is
identified, detecting a potential change in the trend becomes a focus
for the trader because trading at the break of a trend or the failure
to break a trend line is a high probable point of success. Picture 1
shows a downtrend in place and the price twice coming to the trend
line, and then failing to stay above. Although the price actually
created a high above it (where the arrow points), it failed to follow
with another candle at that high point. Thereafter, the return of the
price under the trend line and the resumption of the downtrend would
be recognized by an experienced trader as a sell condition.
The main benefit of
trading with a trend is one of probabilities. An upward trend
presents a greater number of buying opportunities to the trader. It
doesn’t mean there are no good selling or contratrend
opportunities. We can see in the charts that there were countertrend
moves, but much fewer than trend-aligned moves. A prudent trader will
seek opportunities that provide a higher probability of success.
Trading with a trend meets this condition. The question arises: Which
trend should the trader align himself with—the week trend, day
trend, 4-hour trend, and so on?
Each choice has
advantages and disadvantages. The basic trade-off is the increase in
price volatility and range when a larger trend time frame is
selected. Trading in the direction of the weekly trend means that a
trader will see periods of time and maybe days when the price is
moving the other way, threatening losses. But in this case, if the
day trends are also moving in the same direction as the weekly
trends, it represents more confidence that the trend is stable. For
intraday traders trading off a 15-minute chart, when the 15-minute
trend direction is aligned with the 4-hour trend direction and also confirmed by the
5-minute trend direction, there is a high level of robustness to the
trend. The concept of three time zones confirming trading decisions
will apply in many areas.
Simply,
connecting
either two (or more) swing lows or two (or more) swing highs, see
picture 2.
Important,
a third high/low is needed to truly solidify a trendline but this
condition is rare.
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Price Tests Trends and Fails. |
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