I am often asked what I mean by the term"symmetry" in my work. I can attempt to define with words what it means to me in the market but the following charts (visuals) will probably illustrate the concept more accurately. Symmetry is essentiallysimilarity and sometimes equality in the market. Actually, I just used the thesaurus and came up with Balance, Equilibrium and Proportionas synonyms.
Let's start with an example of "symmetry" in both price and time! The first example is on a 15-minuteNasdaq futures chart below. (I had a ball with this one with my subscribers as it started to unfold.) The overall trend on this chart at the time of this "potential trade setup" was bullish. If this trend was going to remain intact, we wanted to consider entering the buy side after a corrective decline terminated. What helps us determine when a corrective decline might terminate? SYMMETRY!
In this particular case, I saw the decline that was playing out in Nasdaq futures approaching the 100% price projection of the prior decline into the 1770 swing low. This prior decline lasted 87 points. If you projected the measurement of this decline and subtracted from the 1918high, you came up with 1831 for this projection and potential support level. The June contract ended up making a new low for the move from the 1918 swing high at 1831 which was exactly 87 points down from that high. Besides this, just eye-balling the chart, I saw symmetry in time. As I checked the "time count" of the corrections, I found that this low made at EXACTLY 100% in price of the prior decline, was also made at 100% in TIME of the same prior decline (22 bars & 22 bars). This is definitely an argument against RANDOM market theory!!
At this point, I had to call this a pivotal low. If we saw price hold above here, we wanted to consider the buy side against it. Although I was not extremely confident that this low would hold, due to the bearish price action going into this low, I watched it carefully. The result was a continued hold above the 1831 low and a initial rally that took this contract to 1992!
In the next chart, we are looking at the 5-minute June S&P contract. Notice the similarity in both the price and time of the corrective declines shown marked with the red lines. They are not EXACTLY the same, but are very similar in both price and time! I constantly watch for similar corrective moves in a market to potentially enter with an "edge" in the direction of the main trend. In this case, the trend is defined on a 5-minute basis! Ideally, we want to see the higher degree time frame trend, agree with the lower. (For example, we want to see the daily, 60-minute and 5-minute agree, all showing higher highs and higher lows.).
When projecting my key price cluster zones, I will lean towards trading against a zone that INCLUDES a 100% projection of a prior decline. Why? Because of the "symmetry." This projection along with a healthy confluence of other Fibonacci projections, tells me to focus on those price clusters that include symmetry. In this case, I saw the 100% projection of the prior corrective decline came in at 1906. Coincidentally, a beautiful cluster of Fib retracements and extensions overlapped this key 100% projection, and gave us a key price zone to consider a trade against (1902-1909***). In this particular case, a low was made at 1909. The rally in Nasdaq futures resumed almost immediately after testing this zone, that included "symmetry."
How about the Nasdaq cash index ? Note that a very important price projection I will be watching for "potential" resistance and/or termination of the rally from the April 4, 2001 low in this market, includes the 100% projection of the prior corrective rally into the Jan. 24 high.
What does symmetry mean to us when we are looking at it as an indication of trend? It can be very helpful in indicating a change in trend, therefore in tell us when to exit a trade and/or initiate a trade in the opposite direction. For example: In the 60-minute Nasdaq futures chart below, when we "violated" the bearish symmetry (we rallied more in time and price than the prior four corrective rallies) it signaled the potential termination of the decline we were experiencing from the 1777 swing high. In this case, after this "symmetry" was violated, buying a pullback to the last low was a "winning strategy." I see this happen over and over again in all markets.
Although using "symmetry" is a wonderful addition to our "technical tool bag," I feel compelled to show you an example of a "break in symmetry" that did NOT result in a trend change. This is just to remind you, that although these methods work extremely well and produce positive results more often than not, when a market does not start the play out as expected, your discipline should be to stop yourself out of the trade in question in order to preserve capital!!
If you begin to study the markets with these concepts discussed above in mind, you have the potential to greatly improve your bottom line in trading.
Plotting trendlines onto a chart is one of the easiest ways for technical traders to get a quick idea of an asset's direction.
As you may know, trendlines come in a variety of different forms and they can greatly vary in length and significance. In this article, we'll take a look at an 11-month trendline that we identified on the chart of NVR Inc. (NYSE: NVR) in our June 12, 2007 ChartAdvisor newsletter, and we'll show how it affected the short-term direction of the stock's price. We'll also cover a simple stop-loss strategy that may be used when trading technical signals based on breaks of support/resistance.
What We Saw
A price move through an identified trendline is one of the most common signals of a trend reversal and, as you can see in Figure 1 below, this was exactly what happened on the chart of June 12 NVR chart. We noted that the drop below the trendline would likely be the first signal of a reversal in the trend, but also that it was important to pay attention to the lower-than-average volume because it could signal a failed break. The low volume was a concern for technical traders because it was showing that the bears were not as interested in pushing the price sharply lower as most were expecting. Given the low volume and lack of volatility, we argued that it would be a good idea to wait several days to confirm that the bulls wouldn't be able to send the stock price back above the trendline.
Figure 1
What happened?
In the case of NVR, the price started to move lower and with this came technical confirmation that the breakdown was valid. The bulls tried to step back in by pushing the price toward the newly formed resistance level, but this attempt was met with a flood of sellers. The retest of the resistance, also known as a throwback, is a common occurrence in trading and the failed move higher is usually the final piece of confirmation needed by traders looking to profit from a pullback.
When the dust settled near the end of July, volatility remained high and volume was trading at higher-than-average levels. NVR shares were hovering around the $600 mark - falling from a mid-month high of $723.
The break below the trendline was a good indication of the impending downward momentum and proved to be a profitable strategy for those who knew what to look for.
No Man's Land
The clear signal of a stock breaking through a trendline is the first step to making a highly profitable trade. However, the act of taking a profit is not quite as easy. A trader's job becomes substantially more difficult when a stock is trading midway between influential levels of support and resistance because, from a technical perspective, the stock could go either way. The questions in the trader's mind come quickly: "Should I take a profit when the downward momentum lets up?" and "Is this just a period of consolidation before the bears continue to hammer the stock lower?"
As you can see from the chart below, NVR did trend lower for the next couple of months, ending near $560. It is important to mention that the extra percentage gain from $600 to $550 comes at a substantially higher cost because the trader consciously ran the risk of giving up a healthy gain in the event that the stock was able to find some unexpected strength. Notice how in Figure 2 the stock was trading halfway between the March 2007 high and the May low from 2006. This can leave a trader uncertain about the future direction. In addition, the declining volume again suggested that traders were losing interest. If a trader does not have a defined target, it may be a wise decision to close some or all of the position at a junction like this and to look for a trade with a higher probability of success.
Figure 2
A Strategy for Managing Stop Losses
There is also a strategy that traders can consider when using trendlines as a basis for a trade. Previous swing highs/lows are a good indicator of potential areas that may influence the stock's momentum. These are levels where the price has reversed in the past and traders will often look for this situation to occur again. As you can see in Figure 3 below, there can often be many levels of support/resistance and one strategy would be to set a stop-loss order above the previous level of resistance (in the case of a short position) and trail the order behind the price as it breaks below the lower price levels. Keep in mind that traders will pay more attention to levels that have been tested several times (red lines) because of their historical influence.
Figure 3
In this example, traders with a higher level of risk aversion, or those with a long-term investment horizon, may instead prefer to trail a stop order above the resistance found two levels above the current price. This would allow the given security to have more room to fluctuate and is used to profit from prolonged downward moves. It is important to note that this version of the strategy will lead to larger losses if the stop price is reached, but can also lead to larger gains.
What We Learned
A drop below a trendline is often used by traders as a signal of a reversal in the current trend. The clear move below a trendline is often a good indicator for determining a strategic entry price. Sometimes it only takes the implementation of a simple risk-management strategy to protect the gains made from an uptake in momentum that accompanies a breakdown through a trendline.
by Casey Murphy, investopedia.com
Casey Murphy is the senior analyst at Investopedia.com and is a graduate of the University of Alberta School of Business. He specializes in technical analysis and is dedicated to uncovering profitable trading opportunities.
Breakout systems like this are always in great demand. It is quick, easy and with a proper use has a true winning rate of over 90%.
Currency pair: GBP/USD, EUR/USD - tested. Other pairs may also be used. Time frame: 1 hour. Indicators: none.
Trading setup:
For this Forex system to work properly a trader needs to know the basics of identifying swings high and low, rules of drawing trend lines, plus be able to use Pivot Points. These are very simple things we believe every trader should know.
Our working range includes 5 candles: from midnight to 4:00 am EST (including the 4:00 am candle). Optional: draw a midnight vertical line for visual aid.
Within those 5 candles look for a valid swing high and a swing low of the price. Draw an Downtrend trendline connecting a found swing High to the most recent swing High of the previous days. (Make sure the last one is valid High to draw an Downtrend trendline through it). Do the same for the swing
Low: connect it to the most recent swing low of the previous days, make sure you are pulling the right trend line using the rules of drawing Uptrend trendlines this time.
If a trader sees, for example, no Swings High in the 5-candle range, that means there will be no downtrend trendlines this morning.
The Entry is on the break of either one of the trendlines and is immediate without waiting for a current candle to close. A protective stop is placed just above/bellow the candle that broke through the trend line.
Profit target:
Usually the whole action is unfolded within the next three candles (count in the candle that had violated the trendline but only if it closed on the other side of the trendline). So, after the actual breakout we have 3 hours or 3 candles to trade, after that we will exit with whatever profits are made. Main rule: Using Pivot points + timing
Profit target is going to be the nearest level of support or resistance according to Pivot point levels. If, however, after only one candle this target is reached, it suggests a very strong market, thus we would stay in trade and set the goal for the next support/resistance level. We would also choose the second Pivot point level of support/resistance as our profit goal if the first Pivot level appears to be too close to our entry point. We have three candles to trade after the breakout, that's why we can trade calm and allow our goal to shift to the next Pivot Point level.
It is an absolute traders' discretion of whether to set the target at the nearest Pivot point support/resistance level and leave the trade once the target is hit or using a timing factor exit after the two / maximum three consecutive candles.
Tip: running two orders can save lots of nerves. First target - the nearest Pivot point support/resistance level. Second - on the close of the third candle.
Another simplified option would be with fixed targets and timing
For example, EUR/USD target = 20 pips - spread, GBP/USD = 40 pips minus spread. These are only suggestions, and for other currency pairs = testing will tell... Hold position open for the next three candles. If the target is not reached within those three candle, close all trading positions anyway.
That's it. Simple and very effective.
Happy Forex trading! Edward Revy, http://forex-strategies-revealed.com/
Creating a support/resistance tunnel on the price congestion and trading on the break of this tunnel is a milestone of Forex trading discoveries.
This trading system/approach needs no indicators and can be applied to any currency and traded in any time frame where coiling in a tight range is spotted.
Entry rules: Find consolidation on the chart and draw two horizontal trend lines – support and resistance. Once the price breaks trough one of the trend lines and a current price bar closes outside the tunnel – buy/sell in the direction of the breakout. (If price pierces the trend line, but did not close outside the tunnel, cancel the previous trend line and draw another one according to the new conditions).
Note: also very often happens that once the price makes it through support or resistance it rocks down/up very quickly and so, more aggressive entry can also be adopted – without waiting for the current price bar to close.
Exit rules: not set, however, it is believed, that the price after breaking the tunnel will travel the distance equal to the width of that tunnel. Advantages: very simple and extremely effective. It can provide 100% profitable entries if short profits are taken - usually with the close of the first candle right after the entry. Disadvantages: very accurate and well thought entry point should be picked. Orders placed very close to the tunnel can be triggered by sudden whipsaw early before real breakthrough occur. http://forex-strategies-revealed.com/
Once TD-lines have been broken, a trader needs to define if the price breakout is true. Thomas Demark suggested TD Breakout Qualifiers:
The first TD Breakout qualifier. Downward breakout is considered true if the bar's close prior to the breakout is higher than the preceding bar's close:
How to use the first TD Breakout Qualifier
Upward breakout is considered true if the bar's close prior to the breakout is lower than the preceding bar's close.
The second TD Breakout qualifier. Upward (downward) breakout is considered true if the bar's open, which is the breakout of the trendline, is higher (lower) than the descending (ascending) TD-Line:
How to use the second TD Breakout Qualifier
As the second Qualifier is stronger than the first one, it is reasonable to open a position even if the first TD Qualifier indicates a false breakout.
The third TD Breakout Qualifier. Upward breakout is considered true if the sum of the bar's close before the breakout, and the difference between the close and low of the same bar (or close two bars before the breakout, if it is lower) is lower than the breakout price:
How to use the third TD Breakout Qualifier
Downward breakout is considered true if the difference between the bar's close before the breakout, and the difference between the high (or the close two bars before the breakout if the latter is higher) and the close of the same bar is higher than the breakout price.
The meaning of a Trend Line is quite complex and though there can be only one valid trend line, the ways of forming it are numerous. Thomas Demark developed a method of how to objectively select two points to form a TD is the abbreviation of the author's name and surname). The method makes trend line technical analysis more objective, turnining it into a mechanical procedure.
First of all, Thomas Demark suggested that trend lines should be formed from right to left because the current price movement is much more important than the previous one. Thus the latest market data in the right side of the chart .
TD-points are points through which the trend line will be drawn. The trend lines are called TD-Lines.
Supply price pivot point is the bar whose top is higher than those of both the top of the previous and following bars. Bearish trend lines are drawn through the bars highs.
Bars with bottoms lower than those of both the previous and following bars are called demand price pivot points. Bullish trend lines are drawn through the bottoms of such bars.
To draw a trend line from right to left two consecutive TD-points should be found and a trend line should be drawn through them:
An example of how to form a TD-line
TD-point is true if:
The demand price pivot point is lower than the close two bars before it.
The supply price pivot point is higher than the close two bars before it.
For the demand price pivot point, the next bar close is higher than the TD-Line rate of advance.
For the supply price pivot point, the next bar close is lower than the TD-Line rate of recede.
These criteria decrease the overall number of TD-points and TD-lines, but greatly improve their reliability.
Highs and Lows found without the aforementioned criteria are called Chart Highs and Lows. Highs and Lows found by these criteria are called True Highs and Lows.
TD-LINES OF A HIGHER MAGNITUDE
The TD-lines described above are TD-lines of Level 1 magnitude, i.e to define each TD-point three bars are needed.
First level TD-lines are short-term. To analyze a long-term perspective of price behavior TD-Lines of Level 2, 3 etc. magnitude are used.
TD-Lines of Level 2 magnitude are drawn through TD-Points using 5 bars: the supply price pivot point should be surrounded from each side by two lower bottoms and the demand price pivot point should be surrounded from each side by two higher tops.
So, to form a Level 3 magnitude TD-line , each TD-Point requires 7 bars and so on.
All TD-points of a higher magnitude level are also TD-points of a lower magnitude level, but not all of them are active points of the first level, as only the two last TD-points of the lower level are active.
TD-Lines of a higher magnitude level have the same logic as TD-lines of the first level, but Thomas Demark recommended to use only Level 1 TD-lines because:
TD-lines of a higher magnitude have a greater probability of breaking the trend line before the last TD-point is formed, and so a good opportunity is lost;
TD-lines of a higher magnitude have a greater probability of enabling the opposite signal (from TD-line of a lower level) before the price target is achieved.
When the TD Line breakout is identified as true, the next step is to set the breakout price targets, i.e. the levels which will be reached after the breakout.
There are three methods to set these price projections after a true trend line breakout:
TD-Price Projector 1 is not very precise in comparison to other projectors, but it is simple to calculate. In the case of an upward breakout, TD-Price Projector 1 is calculated as follows: the range from the lowest price below the TD-line up to the price point on the TD-line immediately above is added to the price in the TD-Line breakout point. In the case of a downward breakout price projection 1 is calñulated as follows: the range from the highest price above the TD line up to the price on the TD line right below is subtracted from the price on the TD line breakout point.
TD-Price Projector 2 is calculated in a similar manner but, instead of the highest (if it is the uptrend) or the lowest (if it is the downtrend) price, it is required to select the low (high) of the bar with the lowest (highest) close below (above) the TD-line. This value is then added to the upward breakout price or substracted from the downward breakout price. Often TD-Price Projector 1 and TD-Price Projector 2 coincide.
TD-Price Projector 3 is the most "conservative" of the three. In the case of a breakout of the descending TD-Line (ascending TD-Line) this projector is calculated as the difference (sum) between the TD-Line and the close of the bar with the lowest (the highest) price below (above) the TD-Line.
Once the trend line has been broken, Demark price projectors indicate the direction of the price movements:
Demark price projectors give the price movement guidelines once the trend line has been broken
Sometimes price projections fail. Usually this happens in the following cases:
As the result of the opposite TD-line breakout, a new contradicting signal appears. In this case the previous signal is replaced by a new one and price projections has to be ignored; or
The TD-Line breakout signal turns out to be false. Usually this becomes clear once the bar after the breakout closes lower (higher) than the ascending (descending) TD-Line, which has been broken.
Prices of goods, commodities and exchange rates are determined on open markets under the control of two forces, supply and demand.
The laws of supply and demand show that:
High supply causes low prices, and high demand causes high prices.
When there is an abundant supply of a given commodity then the price should fall.
When there is a scarce supply of a given commodity then the price should increase.
Therefore, an increase in the demand for a commodity would cause it to appreciate in value, whereas an increase in supply would cause it to depreciate.
The value of a nation’s currency, under a floating exchange rate, is determined by the interaction of supply and demand. We will work through some charts and an example to show how these forces work, from a theoretical point of view.
Demand Curve
Figure 1 shows the demand for British pounds in the United States. The curve is a normal downward sloping demand curve, indicating that as the pound depreciates relative to the dollar, the quantity of pounds demanded by Americans increases. Note that we are measuring the price of the pound-the exchange rate-on the vertical axis. Since it is dollars per pound ($/£), it is the price of a pound in terms of dollars and an increase in the exchange rate, R, is a decline in the value of the dollar. In other words, movements up the vertical axis represent an increase in price of the pound, which is equivalent to a fall in the price of the dollar. Similarly, movements down the vertical axis represent a decrease in the price of the pound.
Figure 1 - Demand Graph
For Americans, British goods are less expensive when the pound is cheaper and the dollar is stronger. At depreciated values for the pound, Americans will switch from American-made or third-party suppliers of goods and services to British suppliers. Before they can purchase goods made in Britain, they must exchange dollars for British pounds. Consequently, the increased demand for British goods is simultaneously an increase in the quantity of British pounds demanded. Supply Curve
Figure 2 shows the supply side of the picture. The supply curve slopes up because British firms and consumers are willing to buy a greater quantity of American goods as the dollar becomes cheaper (i.e. they receive more dollars per pound). Before British customers can buy American goods, however, they must first convert pounds into dollars, so the increase in the quantity of American goods demanded is simultaneously an increase in the quantity of foreign currency supplied to the United States.
Figure 2 - Supply Graph
Equilibrium Price
Suppliers and consumers meet at a particular quantity and price at which they are both satisfied. Figure 3 combines the supply and demand curves. The intersection determines the market exchange rate and the quantity of dollars supplied to United States. At the exchange rate R, the demand and supply of British pounds to the United States is Q.
This is known as the equilibrium or the market’s clearing point.
Figure 3 - Graph of Equilibrium
Changes in Demand and Supply
In figure 4, an increase in the US demand for the pound (rightward shift of the demand curve) causes a rise in the exchange rate, an appreciation in the pound, and a depreciation in the dollar. Conversely, a fall in demand would shift the demand curve left and lead to a falling pound and rising dollar. On the supply side, an increase in the supply of pounds to the US market (supply curve shifts right) is illustrated in Figure 5, where a new intersection for supply and demand occurs at a lower exchange rate and an appreciated dollar. A decrease in the supply of pounds shifts the curve leftward, causing the exchange rate to rise and the dollar to depreciate.
Figure 4 - Increase in Demand
Figure 5 - Increase in Supply
When the forces between supply and demand change, the market moves in ways to clear itself through a change in price.
In international finance markets, if many investors are selling a particular currency, they are making it more readily available and increasing its supply. If there is not an equal amount of buyers, or demand, for that currency, its price will go down in order to strike a new balance between supply and demand.
The direction in which the value of a currency is heading can cause cash to flow into or out of that currency. A currency that is appreciating can cause money to flow into its country’s assets as investors and Forex traders want to benefit from buying or taking “long” positions on the currency as the currency’s price rises.
There are many players that affect supply and demand for foreign currency exchange. Lets meet them.
source: http://www.cmsfx.com
There are some types of trend lines in technical analysis. They are the followings:
Ascending trend
Descending trend
Flat Trend
Reversal trend
As is easy to see, markets tend to trend higher or lower following quite geometrical patterns. In an entire uptrend, it is easy to see a series of higher highs and higher lows. If a joining line is drawn between the rising lows, this is called a trend line and it will often be accurate in projecting where the market will find support on the next hollows, thereby indicating good buying levels. When the price breaks lower through such a trendline, a sharp sell-off will often follow as many Forex market traders will have placed sell stop-orders just below the line for their long positions.The break below an uptrend line is in itself a sell signal, attracting new sellers to the market. It is normally to see the series of lower highs and lower lows in a downwards trending market. The trend line can here be drawn along the descending highs and mirrors the analysis described above.
Technical analysis holds that because every possible bit of information is included in the price of a security, it is not necessary to explicitly analyze the fundamental, economic, political, etc. factors that might influence that price. Because all available information is already included in the current price, only a study of the price movement is required. While it is not explicitly proven that prices must trend, technical analysis relies on empirical evidence and simple common sense to assert that prices do trend. Dow Theory provides much of the empirical time-tested support that prices trend to a technician.
For example, if homeowners believed that interest Forex rate increases will erode the value of their homes, they will be inclined to sell. If there were three similar homes in a neighborhood up for sale, the first house could be sold for $100,000, the second could be sold for $97,500 and perhaps the third could sell for $95,000. Rather than immediately drop down to some formulaic price based on interest rates and other inputs, prices will move consistently over time in one direction. (In a large market like global equities with many participants, prices will move in a zig-zag fashion in one direction.) Prices will continue to decline until there is a balance between buyers and sellers. This gradual (but sometimes quick) directional movement in prices (the trend) is what technical analysis attempts to identify and exploit. If a technical analyst could enter this market, he or she would likely sell short a house because the price trend is downward. A person who does not believe that prices move in trends will find little use of technical analysis. The idea that prices trend is probably the most important concept in technical analysis. Moreover, a person who disagrees with Dow Theory will also likely find fault with technical analysis.
Technical analysis believes that investors en masse display much of the same behavior as the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket,"--these are all examples of investors' attitudes repeating. To a technical analyst, the human characteristics of the market might be irrational but nonetheless they exist. Because investors' attitudes often repeat, investors' actions in the marketplace often repeat as well. I.e., patterns of price movement will develop on a chart that a technical analyst believes have predictive qualities. It is important to understand that the realm of technical analysis is not limited to charting.
Technical analysis is always primarily concerned with price trends. Anything that can influence the price trend is of interest to a technician. As an example, many technicians monitor surveys of investor enthusiasm. These surveys attempt to gauge the general attitude of the investment community to determine whether investors are bearish or bullish. Technicians use these surveys to help determine whether a trend will reverse or whether a new trend will develop. A technician would be alerted that a trend might change when these surveys report extreme investor reactions. When surveys are overly bullish, for example, a technician will look for evidence that an up trend will reverse. The logic being that if most investors are bullish, then they would have already bought the market (anticipating that the market will move higher). But because most investors are bulllish and have invested, it is safe to assume that there are few buyers remaining in the market. With most investors long, there are more potential sellers in the market than buyers despite the fact that the overall attitude of investors is bullish. This implies that the market is set to trend down and is an example of a technical analysis concept called contrarian trading.
When currency demand become exceeds the currency offer the exchange rate grows on Forex. Otherwise the rate falls if participants of the market with more volume of currency intend to sell under the given concrete price which other participants of the market intend to buy .
The growth of a rate sooner or later will be saturated when demand exceeds the offer long time. Since some moment the offer starts to exceed demand. It leads to sale of currency that is expressed in some decrease of its rate - trend correction.
Trend correction: the against movement directed of the previous trend. The given movement does not surpass the previous trend. If to consider a trend is the phenomenon which returns the prices in "a correct channel" and does not allow market movement to deviate fundamental factors.
There are three kinds of trend: ascending , descending trend and flat trend
An ascending trend is denoted by the systematic and extended rise in the price of the given currency pair over some prolonged period of time. This does not mean that the price of the given currency pair never recedes, but merely that in the overall picture the price rises more than it falls in the given timeframe. A theoretical sketch of an ascending is presented on the right.
Ascending trend - the higher value in exchange rate achieved in comparison with previous rate - price movement at which each subsequent local maximum and local minimum above previous.
The bottom points of waves (local minima) join a direct line - trend line:
Descending trend - each time Forex rate achieves lower value - price movement, at which each subsequent local maximum and local minimum below previous.
A Descending trend shares all the characteristics of the Acsending trend but in the reverse direction, thus denoting the fall in the price of a given currency pair.
Trend line is drawn by joining of the top points of local maxima:
The more points of Forex rate values get on a straight line, the more trend is especially confirmed. One of the trend force criteria is its reaction to support and resistance levels. Break of support/resistance level means, that the dominating trend keeps the force. The more trend encounters the resistance or support, being unable to overcomes them, the more strong signal about weakness of a trend we receive, and the more probability of a turn in the future.
There is a number of the general rules of trend force definition:
- The longer the trend is kept, the stronger it is, however it has a limit;
- The more abruptly and more quickly trend, the stronger it is;
- The long flat trend has an every prospect of the continuation;
- Very abrupt trend can abruptly turn over also;
- Any trend slackens, however probability of continuation of a trend in its any point above probability of its turn. Flat trend or sideways trend is also known as a trendless, ranging or flat market. Though similar to the other two types, the sideways trend shows no major difference in the price values between the beginning and the end of a specific time period. The sideways trend denotes market conditions in which prices may be moving back and forth between levels of support and resistance (covered next).
Reversal trend
Change of a trend (reversal) is expressed in change of a rate movement direction after a break point (penetration point). However it should be distinguished from a simple non-standard rate deviation which doesn't lead to change of a trend.
The break point forms a sell signal for the confirmed change of an ascending trend, the confirmed change of a descending trend forms a buy signal on Forex.
The best confirmation of change of a trend can be received when the former resistance line becomes a support line of a trend and on the contrary.
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.
