One of the first things to try to get a handle on in forex trading is the use of trendlines, which is easy to grasp once you know what you’re looking at, says Casey Stubbs of WinnersEdgeTrading.com.
Using trendlines is the most basic form of Forex trading but also one of the most effective.
Displayed as a graphic chart known as candlesticks, trendlines are easy to understand once you know what you are looking at.
The Candlesticks
The candlestick chart resembles a simple bar graph with a few modifications. Instead of a simple bar being used to represent a value, a candlestick is used which can quickly portray more information. The body of the candle represents the open and close price of a currency, while the wick coming off of each end represents its highs and lows in price during that time.
As you study the candlestick chart you should be able to easily note where the price of a currency made a shift in direction. This is known as the pivot point. Traders will use these as a tool to help predict when they should enter into a trade.
The candlestick chart should represent moving averages as opposed to real time data. Moving averages simply means that the numbers on the chart are representative of the average price during a certain time frame. It is important that you understand if the pivot points represent daily changes or the previous four-hour average. This will make a difference in how you use pivot points to observe trending.
As you study the graph you should be able to see distinct peaks and valleys. These are known as the swing highs and lows. Swing highs and lows should be topped by a pivot point.
The color of the wick lets you know whether the currency is heading up or down. Red shows a downward projection of price while blue indicates that the price has risen during that time.
Trendlines
Once you understand the basics of the chart you are looking at, you can begin to use trendlines as a tool for picking entry points into a trade. To start, you are going to draw a line that is connecting your pivot points, either where they swing high or low. What you are looking to see is that your line is not broken by another candle in between the pivot points. If there is, then you missed another important pivot point, invalidating your trendline.
Support and Resistance
The support line follows the low price points of the currency. Shown by connecting the bottom pivot points, if this trendline is heading upwards then you are looking at a bullish market and a good time to buy.
The top trendline is the resistance, or peak price points for the currency. When this type of bearish market is trending downwards, that would be your opportunity to sell. The best time to take action in either scenario is when the price is as close to the trendline as possible.
NEXT PAGE: More Trendline Tips to Remember
|pagebreak|Trade on the Uptrend
If you were to trade based off of the support trendline—which would be where the bottom pivots are connected—then you are uptrend trading. This is where the currency is bullish, or growing in price. Traders refer to it as the support line, as it is expected to support the price and not allow it to drop below it.
To enter on an upswing, you wait until the price gets close to the trendline, this is where the currency should be at its lowest in price.
This may seem very conservative, but I always enter a few pips above the support line. This way, if the pivot occurs before my prediction, I still have the opportunity to enter the trade.
Remember, other traders are looking at the same candlesticks too and could drive the price slightly sooner than you expected. This is why I adopted my conservative approach.
Downtrend Trading
Downtrend trading is used primarily during a bearish trend, when prices are dropping. Connecting the top pivot points on your chart will show you the resistance, or the top price that currency will reach. Track the downtrend by connecting the pivot points that are representing lower highs.
Using the Bounce
When a trader is using a bounce technique, he is watching the chart to try and predict where the uptrend or downtrend will take a sudden turn. Those turns are represented by the pivot points. In this case, you are going to want to enter the trade immediately following the bounce off of the support line and then hold it until right before it makes a bounce off of the resistance line.
This is the trendline system that requires patience and discipline as many traders will look at the small dips a currency will make during the day and automatically panic thinking they will not reach their goal. Stay true to the entry points and stop losses you have set out to avoid getting emotionally involved with the growth of the currency. If it does begin to trend against your prediction, don’t let it ride to see what will happen. Pull it out of the trade and free that capital up for another one.
There is no need to be embarrassed if you are still having trouble developing and using trendlines. Enlist the help of a more experienced broker who will be able to explain how exactly they work and how to make them work for you.
By Casey Stubbs, Founder, WinnersEdgeTrading.com
