A very important and commonly used tool that is associated with the concept of market analysis using technical analysis is a trend line. A trend line is basically a line which is formed when a diagonal line is drawn between two or more pivot point on a price chart. These lines which are also called Dutch lines can be used to determine when is the best time to enter or exit a trade in the currency market. Though, these lines are quite important there are not many who realize the true potential of using these lines.
A trend line is a very powerful tool when it comes to determining how the market is at the moment. In general an uptrend line is one which is drawn along the bottom of the support areas and a down trend line is one which is drawn along the tops, usually to determine areas of resistance. A trend line can be very easily plotted by locating the two major tops or bottoms and connecting them with a straight line. Basically when it comes to trend lines, they are of three types.
These are the lines which describe the movement of the prices of a currency pair when the overall market is moving in the upward direction. In case of a prevailing uptrend, the prices move upwards, with minor fluctuations which might take place in the downward direction.
Unlike an uptrend line, a downtrend line can be defined as a line that is used for the purpose of describing the price of a currency pair when the overall market is moving in the downward direction. When a downtrend occurs, the prices keep on falling with small fluctuations which might occur in the upward direction.
Sideways Trend Lines
These trend lines are not like uptrend or downtrend lines. These are generally horizontal or flat in nature and do not represent either an uptrend or a downtrend in the market. These have their importance because they can be used to understand how the market might behave in the near future. These trend lines generally indicate that there is going to be a reversal in the direction of prices in the near future. Hence they can be used to find out when an uptrend would be changing into a downtrend and vice versa.
Sideways trend lines also denote a pause in the movement of prices and can be used to determine entry and exit points.
Trend lines are at the very heart of technical analysis. If they are plotted correctly, they can be a great tool for predicting entry and exit points in the market and can help in earning a lot of money in the currency market. Most of the traders believe that trend lines are quite simple; hence they are not very effective in predicting the movement of prices in the market. Well, they are wrong primarily because of the fact that a tool that relies on the basics and the fundamentals can never be wrong. And since trend lines are based on one of the most basic concepts relating to forex trading, their results cannot be wrong. All one needs is the ability to interpret the results and use them while trading in the currency market.