As you know, forex technical analysis is interpreting the forex market by analyzing the price movements on a chart. A trend line is one such key tool used in technical analysis as a reference for future market movements. Essentially, a trend line is a line drawn on a price chart connecting the most visible highs or lows of a trending market. And making use of forex trend line analysis, traders can come up with possible directions the market can move.
A market is said to be in a trend when the price of an asset moves in a particular direction. So if the asset price keeps going high it is called an uptrend and when it goes down it is said to be in a downtrend. In an uptrend, the trend line is drawn by connecting the most significant lows i.e. the most visible valleys (support) on the price chart. This is called an ascending trend line. In a downtrend, the trend line is formed by joining the most prominent highs or the peaks (resistance) on the price chart. And this is called a descending trend line.
Although you can draw a trend line by connecting just two peaks or valleys in a price chart, you need at least one more to validate it. And the steeper the trend line, the more likely it is to break through the support or resistance level. Because it is hard for prices to maintain a near-vertical rise or fall for long. The support and resistance of any asset are ever-evolving, as it keeps moving with the price over time. In an uptrend market, the support level keeps moving up (rising) as time progresses and in a downtrend, the resistance level keeps moving down (falling) with advancing time. This characteristic is known as dynamic resistance or support.
A Trend channel is yet another concept derived from the trend line theory. If we draw two trend lines parallel to each other, where the upper trend line depicts the resistance and lower marks support, then the area enclosed within is called a channel. And the price of an asset keeps bouncing between this support and the resistance level of a channel. Traders can utilize these channels to identify potential trading opportunities. The basic idea is to buy at the bottom of the channel and to sell at the top.
There are mainly three types of trend channels; ascending, descending, and horizontal. The prices move in higher highs and higher lows in an ascending trend channel, thus creating a positive slope. While in a descending channel the price movement creates a negative slope with lower highs and lower lows. Also, a positive slope is considered bullish and a negative slope is bearish. And finally, in a horizontal channel, the price moves sideways rather than up or down.
While forex trend line analysis is a useful tool to have in your arsenal, it is susceptible to human error and market movements. And as trends are dynamic events, consequently the trend lines also have to be adjusted each time. So keep in mind that trend lines are just guidelines for determining possible trading opportunities.
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