Introduction to Basic Trendline Analysis provides an introduction to the topic of price action that is based on the structure of a trendline. This method is primarily used in forex and commodity markets, but may be used in numerous other financial markets. Trendlines are used to identify breakouts or to help traders predict market direction. There is one inherent problem with trendline analysis and that is the assumption that price is the only variable that can be considered in trendline calculation.
The truth is, price does not always move in a predictable and consistent fashion. Even when price bounces, it does so without a consistent pattern or a period of support or resistance. Many traders focus first on support and resistance levels, which can be extremely useful indicators for trading. However, they are not the only indicators that should be considered when planning to trade long term.
If you are unfamiliar with the term “trendline”, here is a simple definition. Trendlines are horizontal lines connecting two points, one above the other. These lines are drawn by hand using a mathematical algorithm. This form of technical analysis is often used in order to simply predict where a stock may go next.
Unfortunately, most trendline analysis formulas actually fail for several reasons. First, most formulas treat the closing price as the support level and the support as the resistance level. In reality, there are multiple levels of support and resistance that may exist during any trading session. Moreover, support and resistance fail to provide any consistency in price movements. As a result, traders often use these support and resistance levels as “safe havens” where their trades are most likely to earn a profit.
However, trendline calculation is not complete without proper identification of the trendline. There are many different formulas out there for calculating trendline traces, but they all boil down to identifying support and resistance levels. Although traders can get good results from some of these formulas, it is still vital to select the right one for your trading strategy. Here are a few tips on how you should evaluate a potential trendline:
Look at support and resistance levels. The strength of a support or resistance level is often determined by changes in price. It is then translated into a “level of confidence” in the system by calculating what would happen if the trendline were to break at this point. More importantly, traders should also be aware that a break of the trendline does not always equal the end of the trend. Sometimes, it just leads to more consolidation or replacement.
Also, bear in mind that price and volume usually follow a trend. So, a trendline has nothing to do with long term profitability. A trendline only shows where prices have been in the past. It cannot tell you whether the price will continue on its course or turn around. So, you must use trendline analysis for resistance and support and make your decisions based on cold hard numbers, not emotions.
So, what is the best way to learn about trendline analysis? There are many software programs out there that can provide useful information about trends. You can use them all to educate yourself before you spend some money to purchase an analytical tool.
However, some of the trendline analysis tools that you might want to try are the following: Free Forex Trend Line, FAP Turbo, Forex Funnel and Supra Forex. With these tools, you can quickly see where the currencies are moving. You can look up their historical support and resistance levels as well. But, which one is the best? That’s a matter of personal preference. Some people like to see charts and others prefer to get the information from real time market action.
Now, when you use trendline analysis, you are looking for breakouts. You want to identify when the price crosses the trendline and when it breaks out of the trendline. If you are looking for breakouts in relation to the current price, you need to know the distance between the high and the low in the chart. The distance is typically a positive number.
With that information, you can determine when the support line is broken. For instance, if the line has a positive slope (which indicates support) and the price has not broken through the support zone, then the price is overbought. If the line has a negative slope (which indicates support), and the price has broken through the support zone, then the price is oversold. When this happens, you want to sell your covered position before the price moves back down to a reasonable level. The nice thing is that if you know where the support zone is, you can take advantage of it when it is weak and you can buy covered positions at cheap prices.