Drawing Trend Lines are one of the best ways to analyze the Forex Market. It is also simple to learn and easy to apply. Trend lines are a useful tool to predict future price movements. They dissect the market into two trading zones - a Buy Zone and a Sell Zone. These zones help indicate the prevailing trend of the market.
Every Trader must determine the current trend. To trade against a trend is committing financial suicide - you may win on several occasions but ultimately market momentum is stacked heavily against you. In the Forex Market, trading against the trend is like swimming against a Tsunami. You are exposing yourself to huge risks.
By simply drawing trend lines you can quickly determine market direction and flow with current momentum. Trend Lines clearly provide visible boundaries. Charts are dissected into trading zones - for example, candlesticks above, or north, of the trend line is what I call the "Buy Zone" - only look for buy entry opportunities to move in an upward fashion. By trading in this manner you are flowing with the trend and increase your chances of success. After all, trading is about finding high probability trades. The same applies when the candlesticks are below, or south, of the trend line: this is the "Sell Zone" and only look for sell entry opportunities.
To take advantage of the market a Trader should learn to draw COUNTER Trend Lines, This line is drawn from the top left hand point to the bottom right hand point, at roughly a 45 degree angle - this line is opposite to the main upward Trend Line. For example, the Forex Market flows in a wave pattern. This wave is a 4-Point A-B-C-D pattern. If you are in the "Buy Zone" the market will rally from point A to B. After significant price movements, the market will naturally retrace from B to C. As the market retraces, draw the counter trend line from B to C. When the market breaks through this counter trend line prices will accelerate and extend from C to D. This is the most lucrative and profitable part of the wave pattern. Counter Trend Line breaks are hugely profitable!
Trend Lines also help to determine when the market will change direction. Broken trend lines immediately tell a trader that future price movements are "likely" to shift direction. Candlesticks will move to the other side of the line to begin a reversal and enter the "Sell Zone". Momentum has changed.
Many Traders rely too heavily on computerized charting programs to make decisions. Their programs can provide conflicting indicators and increase the level of confusion. Trend lines are a quick and reliable tool for market analysis. By following a simple methodology with Trend Lines you will increase the likelihood of profitable trades.
Erik Teh
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