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How To Make Money With Forex?
When you examine a FOREX chart you can see the price movements moving up and down in a wave-like pattern.
The price swings from highs to lows in an unpredictable way (or so it seems). The price chart can be compared to a mountain range where you can see the jagged line of the mountains as they touch the sky.
Identifying Which Way The FOREX Market Is Heading Next
The chart is either in an uphill trend, a reinforcing (consolidating) position, or it is in a downward trend.
For the scope of this article, we are going to discard the consolidation phase and concentrate on the trends.
When a market is in a rising or in a descending passage for a period of time then we say it is in a trend.
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How do you define a trend?
- An upward trend starts from the bottom left and ends in the top right of an area of a chart. It is a slope that is a series of highs that can be connected to make a sloping line.
- A downhill trend starts from the top left and ends at the bottom right of a chart. It is a slope that is a series of bottoms that can be connected to make a sloping line.
The greater the number of tops or lows that connect to form these lines, the more enforceable the lines are and so are more likely to repeat in the future.
So how do trend lines work when it comes to your trading?
After you have spotted a trend line then it can be projected so that it can be used for prices in the future. This trend line now becomes a future support or resistance area which is a probable area for a u-turn.
The reliability of a trend line for predicting future price movements is dependent on things like the number of points it has hit previously. Another parameter to consider is if there are any combination of indicators at the same place supporting the trend line.
Different indicators that can help here include Japanese Candlestick formations, relative strength, and momentum indicators, support and resistance areas, round numbers, and moving averages.
Another important aspect is to examine higher time frames to see if other trend lines are occurring in the same place and so reinforce the existing trend change. All of these examples provide supporting evidence that something is about to happen.
When a price approaches a trend line, one of two things can happen.
Either it can recoil off the line and go back the other way, or it can break through the line.
We are never certain either way and as traders, we must be prepared for both possibilities.
Sometimes the price might break through the line and shift track. This happens when the price breaks through a trend for 2-3 days and then suddenly retreats and continues in the original direction.
Finding unions will help to eliminate the chances of false breakouts. When you are trading these moves it is sensible to use a tight stop loss strategy to ensure you lessen any potential losses.
If there is a breakout from the track then there is a high probability that a new trend will begin along in a new direction.
Remember that a new direction is confirmed when a line can touch three or more highs or lows.
Two points are not reliable enough to confirm a new trend.
How do you make profits from trends?
Trend lines identify what might happen to price action in the future. Once you have located them they can be extended into the future as long as you want.
In time the price action will come close to these trend lines again, and one of two things can happen.
First, the price can reverse as the trend line is still established. Once this happens, a trader can open a position following the new trend, with a stop loss just on the other side of the trend line.
The alternative action is that the price breaks through the trend line and continues forward. This will create a new trend.
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The trader opens a position in the same direction as the new trend and places a stop just before the old trend line.
There is a higher probability of the first case occurring especially if there are other indicators that support the prediction that happen at the same time.
Conclusion
Trend lines are important elements of any trading strategy that is profitable, but they should not be considered in isolation
but in conjunction with other indicators that support it.
The longer a trend line and the more highs or lows it has touched the stronger it is and the more reliable it becomes as a future indicator of a reversal.
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