Trendline Basics

Trendlines represent lines on the price chart of a currency that are depicting the general direction in which the price moves. They are one of the main tools used for the price chart analysis.

It is a well known fact that the forex market moves in a zigzag direction, without following a particular straight line. The mutual placement of upper and bottom points on the zigzag line allows forex traders to draw a line that connects the peaks or troughs of a corresponding zigzag. When the market is experiencing bullish conditions, troughs should be used to draw the trendline. On the other hand, when the market is experiencing bearish conditions, the peaks should be used to draw the trendline. Only two points are needed so that the trendline is plotted and no other price movement should cross the trendline between those two points.

A trade channel is formed by the trendline and a line that goes almost parallel to it and is drawn on the opposite side. The wider the trend channel, the more reliable it is.

The borders of the channel are the trendline and the parallel one. The upper border of the trade channel is referred to as the support line, whereas its bottom border is called resistance line.

The borders of the trade channel help forex traders identify the price levels of support and resistance, meaning the levels beyond which the currency price will have a difficult time moving. Those levels can be very useful to traders for identifying the right place to set a stop loss order. Additionally, technical forex traders watch closely the price movement when it approaches the trendline because this can give them indications of the future path of prices:

• if the trendline is penetrated, there is a higher probability that a reversal of the trend is occurring or at least that the current trend is weakening
• if the price of the currency bounces off the resistance and significance levels, this is considered a sign that the significance of the trend increases

It is believed that the longer the trendline is and the more prices touch the line without penetrating it, the more influential the line is. Trading volume also has a significant role, particularly at the support and resistance levels. The trend increases in significance when the volume is heavy and the price of the currency bounces off the resistance and significance levels.