What is Trend?
In Forex trend is your Friend. A Trend refers to the direction of Forex Market Prices. Rising peaks and through constitute an up trend, falling peaks and through constitute a downtrend that determines the steepness of current trend. The breaking of a trend line usually signals a trend reversal.
Plotting a trend line on a Forex chart gives very valuable information. It helps to determine good entry and exit points, best positioning for profit taking and placing protective stops. But difficulty arises because of the time factor. Whenever we talk of trend it has to be related to the context of time.
An intraday (relates to action on that particular day only) Forex Market Price chart may show a significant trend, which is different to a trend recognizable on a daily Forex Market Price chart, which may be different to a trend on a weekly chart.
Success depends on recognizing and trading the appropriate trend. Successful investing depends on recognizing the short, medium or long-term trend and their correction (Rallies and Dips) inside the larger trend. We will usually be trading when at least the short term and intermediate term trends are in the same direction. The ideal will be when all three trends are in unison, but this is not a prerequisite, as intermediate trends can be substantial in both time and Forex Market Price.
A trend line confirms its validity when the Forex Market Price respects this line. The more times Forex Market Prices touches and bounce back, the stronger it becomes.
Broken trend line will warn us of a possible reverse of the trend. A trend line is considered broken when a full bar body has completely formed on the other side of the line. It is not broken when the Forex Market Price just pierced the trend line.
How to draw a Trend line?
A trend line is a straight line that connects two important lowest low (Low Open/Close) or highest highs (High Open/Close) points in the chart. It should be noted that a trend line should not intersect other Forex Market Prices between these two points. Any amount of secondary and small trends can be found within the main trend because sometime our trend line will need to be readjusted to the current Forex Market Price moves. Do so, but consider your old trend line to be valid for some period of time. It can still serve you well.
First understand few things about candlestick chart. In below picture you can see what represent High / Low Open and High Close / Low Close.
Now, let’s see the chart below. This is EUR/CHF at Hourly time scale: (I deleted some part of the picture to help you understand the concept)
In the Up Trend, Forex trend line that connects at least two lowest low (Low open/Close) will create a trend line. In the uptrend a trend line acts as Support.
Similarly we can draw trend line for downtrend. In the Down Trend Forex trend line that connects at least two highest highs (High Open/Close) will create a trend line. In the downtrend a trend line acts as Resistance.
In below picture price broke our trend line at red square and start moving up.
Remember this: To draw a trend line, it is enough to have two points it to be drawn through, and one more point to confirm the trend.
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