It is said that in the foreign exchange market, the price of any currency pair will “trend” 70% of the time. This means that the currency pair will favor one certain direction, but it will not move in a perfect straight line.
Think of this like taking three steps forward, and one step back.
Over time you will move forward. But in the short-term, you’re moving forward and back. The markets don’t move in a straight line, and tend to move up by a large amount, then down by a smaller amount, before moving back up by a large amount. The same is true for downtrends.
Drawing a Trendline
A trendline is used to establish positive and negative trends; it seeks to answer, “is the general movement up, or is it down?”
To draw a trendline, forex traders look for very easily discovered support and resistance lines that are diagonal. We’ll showcase this with the following chart:
On the chart above, we drew a diagonal support line – a trend line – that supported the uptrend. In doing so, we uncovered points at which currency pair was likely to bounce higher.
In general, you should know:
- Steeper trends tend to be less accurate, and more likely to break. Currency pairs can’t rise or fall quickly forever, and the market tends to break those which are drawn at very steep inclines or declines. (This is the basis for technical indicators like the Gann Fan).
- You can’t make trendlines work. If a trend line doesn’t fit, do not try to make it fit. In the process, you’ll end up making a trade based on a trend line that doesn’t really exist.
- Trend lines are not perfect in the same way that support and resistance is not perfect. Small movements above resistance trend lines and below support trend lines is normal.
- Like support and resistance, trend lines are usually confirmed by three tops and bottoms that touch the line.
In the next lesson, we’ll show you how to apply trend lines to create ranges and channels for currency pairs.
