Saturday, March 5, 2011

Forex Trading Tools & The Three Trend Line Strategy

There is no one single super smart FOREX trading tool that gives you profit, profit, and more profit. The only possible solution is using a combination of different tools to identify the favorable market forces to get the most high probability trades over a period of time. Trend lines are the most popular and reliable FOREX trading tool that successful traders will recommend.

Trend Lines are an important tool for trend identification and confirmation in technical analysis. Trend lines are straight lines that connect two or more price points and extend into the future to guide you.

There will be lines drawn across significant lows in an uptrend, and across significant highs in a downtrend. To roughly classify trend lines, we can divide them into three types: short term trend lines, medium term trend lines, and long term trend lines.

1. Short Term Trend Lines

These lines are drawn across the most recent two lows for an uptrend or across most recent two highs for a downtrend. The best observations are found on a smaller time frame such as a 15 minute or 30 minute chart.

2. Medium Term Trend Lines

These are best observed on a higher time frame like a 60 minute chart. These lines either connect the nearest significant low to current price action to the previous significant low in an uptrend or the nearest significant high to current price action to the previous significant high in a downtrend.

3. Long Term Trend Lines

These use higher time frames such as the 4 hour chart or the daily chart to draw long term trend lines using the same method of Medium Term Trend Lines. The long term trend line is considered as an effective FOREX trading tool. The daily chart is used mostly by traders of big institutions who do not usually engage in small moves on an intraday level.

By drawing a trend line on a daily chart you can graphically analyze where price is and where it is likely to bounce, but you should employ trend lines as a FOREX trading tool with caution and discretion. Covering your charts with every trend line possible will result in confusion and blurry analysis.

It is not a good idea to rely completely on a short time trend line as these merely give you a defined picture of current price action. These are broken often during the course of a day. Their main use is to give you a clear, instantly recognizable graphical representation of current price behavior.

If you notice the price coming back to test a trend line on the higher time frames, look at other factors. Draw in horizontal lines to mark key support and resistance using previous highs and lows. Draw Fibonacci retracement and extension levels. Calculate the daily pivot points and put them on your chart. Have the 200 EMA (Exponential Moving Average) shown on your charts.

Do this and you will maximize the benefits of the three trend line strategy.

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