When you are forex trading you really need to take advantage of anything you can. A slight edge can mean the difference between thousands literally. That is where this article comes in. We are going to look at how drawing trend lines can give the forex trader an advantage.
Just a basic reminder about technical analysis, technical indicators make different mathematical calculations and display the results on a price chart. The skilled forex trader interprets these technical indicators and makes trading decisions.
The most basic technical indicator is is one that you can draw with your own hand, it is referred to as a trend lines.
To draw trend lines simply:
1. Print out an historical price chart for a given time interval of a currency pair.
2. draw a line connecting two or more parts of a graph that have higher lows, or lower highs.
Poof, now you have trend lines. The trend line represents the basic price direction of the currency pair. When the price of the currency pair breaks through the trend lines in the direction opposite of the trend, you would expect a reversal.
By reversal I mean this:
1. If the prior trend was upward and the price broke through the trend lines moving down, this would indicate a new downward trend using the trend lines method.
2. If the prior trend was downward and the price broke through the trend lines moving up, this would indicate a new upward trend using the trend lines method.
Trend lines can act as either floors or ceiling for price data. When these lines are penetrated, the price usually moves completely to the other side of the trend line.
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