By: Charley Warady
The Forex trend line is the most basic and yet the most valuable technical analysis tool available. Everybody uses it. It is the basis for all other analysis. The simplicity of it and the obviousness of it are what makes it a standard seen on just about every chart in Forex.
All it takes is a few reversals and the ability to draw a straight line. Every live chart on the Internet using a Java application avails itself to this technique with a click of the mouse. The Forex trend line is sometimes recognizable even without the use of a line.
What it is
If the market is moving in an upward direction, but has at least two progressive swing points, the line that you can draw underneath those swing points is considered a legitimate Forex trend line. It shows you where the support is and lets you predict where the next level of Forex support may be.
On the opposite side of the coin, if the Forex market is moving in a downward direction, connecting those swing points above them will give you areas and points of resistance on a bearish Forex trend line; not only past and present, but future as well. These will serve as your entrance points into the market.
Then there's the horizontal move. It makes no difference as far as the Forex trend line is concerned, therefore there should always be a Forex market to trade. Connecting the swing points, like connecting the dots, are going to give the Forex trader a complete picture of the Forex market where it is in the present and give him the probability of where it is going.
The Forex trend line doesn't only involve one line (although it can). If the Forex trader takes the bottom points of the swing points and draws a line, and then takes the top points of the swing points and draws a line; the chart immediately gives you a trading range. You have right there a support level and a resistance level. You have a predicted entrance point and an exit point. With the addition of another line or two, the chart will also give the Forex trader a place to insert the stop-loss.
When the Forex market breaks out of a particular trading range it gives an opportunity to a whole new set of lines. The resistance becomes the support (if the market is going up) or the support becomes the resistance (if the market is on a downturn). If you want to create a new trading range from there, a new Forex trend line will have to be drawn depending on the situation and the amount of swing points available.
The Forex trading range doesn't always run in parallel lines. Oftentimes the lines will narrow and intersect. Therefore, when this happens a possible trading range will be lessened and the chances of a breakout will occur. At the point of intersect the Forex market has to be watched closely because that particularly is usually important in the realm of a new support or resistance. The Forex trend line is the foundation of everything Forex. Pay attention to it.