Chart Basics (Trends)

Chart Basics (Trends)

  1. 2.1 Level 1 Forex Intro
  2. 2.2 Level 2 Markets
  3. 2.3 Level 3 Trading
  1. 3.1.1 Technical Analysis for Forex
  2. 3.1.2 Moving Averages in Forex
  3. 3.1.3 Identifying Trends in Forex
  4. 3.1.4 Resistance & Support
  5. 3.1.5 Double Tops And Double Bottoms
  6. 3.1.6 Bollinger Bands
  7. 3.1.7 MACD
  1. 3.2.1 U.S. Dollar
  2. 3.2.2 Euro
  3. 3.2.3 Japanese Yen
  4. 3.2.4 British Pound
  5. 3.2.5 Swiss Franc
  6. 3.2.6 Canadian Dollar
  7. 3.2.7 Australian/New Zealand Dollar
  8. 3.2.8 South African Rand
  9. 3.2.9 The Employment Situation Report
  10. 3.2.10 Unemployment Insurance Weekly Claims
  11. 3.2.11 The Fed
  12. 3.2.12 Inflation
  13. 3.2.13 Retail Sales
  1. 3.3.1 EUR-USD Pair
  2. 3.3.2 Trading Rules
    1. 3.3.2.1 Never Let a Winner Turn Into a Loser
    2. 3.3.2.2 Logic Wins; Impulse Kills
    3. 3.3.2.3 Never Risk More Than 2% Per Trade
    4. 3.3.2.4 Trigger Fundamentally, Enter and Exit Technically
    5. 3.3.2.5 Always Pair Strong With Weak
    6. 3.3.2.6 Being Right but Being Early Simply Means That You Are Wrong
    7. 3.3.2.7 Know the Difference Between Scaling In and Adding to a Loser
    8. 3.3.2.8 What Is Mathematically Optimal Is Psychologically Impossible
    9. 3.3.2.9 Risk Can Be Predetermined, Reward Is Unpredictable
    10. 3.3.2.10 No Excuses, Ever
  3. 3.3.3 USD-JPY Pair
  4. 3.3.4 GBP-USD Pair
  5. 3.3.5 USD-CHF Pair
  6. 3.3.6 Leverage
  7. 3.3.7 Fundamental Speed Strategy
  8. 3.3.8 Carry Trade
  9. 3.3.9 Money Management
  10. 3.3.10 Forex Futures
  11. 3.3.11 Forex Options
  1. 5.1 Short Term
  2. 5.2 Medium Term
  3. 5.3 Long Term

When a collection of data points are plotted on a chart, you may start seeing the general direction in which a currency paid is headed towards. In some cases, the trend is easily identified. For example, the chart clearly shows that the currency pair is rising over time:

On the other hand, there will be instances where trend is much more difficult to identify:

Therefore, more commonly, trends tend to operate in a series of gradually moving highs and lows. Thus, an uptrend is a series of escalating highs and lows, while a downtrend is a series of descending lows and highs.

Figure 3 is an example of an uptrend. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend, if it does, it is deemed a reversal.

Figure 4 – USD/CAD

Types of Trend

There are three types of trend: Uptrends, Downtrends and Sideways/Horizontal Trends (The latter occurs when there is minimal movement up or down in the peaks and troughs). Some chartists consider that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction.

Trend Lengths

Along with these three trend directions, there are three trend classifications that have to do with time duration in which the trend is taking place. A trend of any direction can be classified as either a long-term trend, an intermediate trend or a short-term trend. For forex trading, a long-term trend is composed of several intermediate trends. The short-term trends are components of both major and intermediate trends.

Take a look a Figure 4 to get a sense of how these three trend lengths might look.

Trendlines

Trendlines represent a charting technique, which a line is added to represent the trend in a currency pair. Drawing a trendline is as simple as drawing a straight line that follows a general trend. Trendlines can also be used in identifying trend reversals.

As you can see in Figure 5, an upward trendline is drawn at the lows of an upward trend. Notice how the price is propped up by this level of support. You can now see how this trendline can be used by traders to estimate the point at which a currency pair will begin moving upwards. Similarly, a downward trendline is drawn at the highs of the downward trend. This will indicate the resistance level that a currency pair experiences when price moves from a low to a high. (To read more, see Support & Resistance Basics and Support And Resistance Zones — Part 1 and Part 2.)

It is important to be able to understand and identify trends so that you can trade and profit from the general direction in which a currency pair is heading rather than lose money by acting against them. Now that you know a little about candlestick charts and trend, we can introduce you to one of the most popular chart patterns: Head and Shoulders.

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