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A widely used tool to define a trend is a trend line. A rising or ascending trend line is constructed by connecting the first two higher lows in an uptrend and extending the line into the future.
You need at least two higher lows to connect a rising trend line and extend it as shown on the chart. The trend line usually acts as a support for the price, as obvious in the third and fourth touches.
[Image: Rising trend line connecting higher lows]
Image: Rising trend line example
The opposite goes for a falling trend line. We need at least two lower highs to connect, and the trend line should be treated as resistance.
Understanding Trend Line Significance
Trend lines represent the slope of the move or the slope of supply and demand. If the trend line is very steep, that indicates a strong overwhelming demand compared to supply.
As the trend line represents the slope of supply/demand, a break of it is indicative of a change in the supply/demand trend.
Usually, the price penetrates a trend line during the trading session of the time interval under analysis, but never closes the session below or above the trend line.
Also, the trend line should be adjusted following minor false breakouts.
Technical analysis is more of an art than a science. Don't be overly specific or look for perfection – you will rarely find it. The market may not react exactly at the trend lines every time.
Sometimes prices may move a bit higher or lower on an intra-day basis but close on or near the lines. Minor adjustments to trend lines are normal and expected as new price action develops.
A repetitive phenomenon in the forex markets is price acceleration and deceleration. It is very common that you see the price trend start suddenly to accelerate and the upward wave gets sharper and steeper, especially in times of speculative bubbles.
A rising trend line can be drawn for each acceleration phase. Where a break below the steeper trend line signals a move to the next less steep trend line.
[Image: Chart showing accelerating trend lines]
Image: Accelerating trend line example
Decelerating trend lines show the opposite phenomenon. The first upward wave is steeper than the subsequent waves. The price decelerates, breaking the first rising trend line but not resulting in a reversal, and moves back higher. A new trend line is then drawn to account for the new trough or peak.
A channel looks like a rising or falling tube that carries the price motion. It is constructed with two parallel trend lines.
In an ascending channel, two rising trend lines form the channel:
Channel Trading Principle
Trend channels usually contain most of the price action. In an ascending channel, the price tends to find demand near the bottom of the channel, while supply increases near the top of the channel.
[Image: Ascending channel with parallel trend lines]
Image: Ascending channel example
A falling or descending channel is constructed by parallel falling trend lines. The upper falling trend line is considered resistance, while the lower falling trend line is support.
Moving averages are one of the most popular and reliable tools in technical analysis. They are used mainly for trend determination.
Moving averages are one of the many technical indicators. Simply, what technical indicators do is take the prices and process them in a mathematical equation, then produce the result on a chart.
What is a Moving Average?
Simply, a moving average is an average of the closing price in the past X periods. It's calculated for each new period and plotted on the chart. The result is a smooth continuous line that represents the price average for that past X period.
A moving average smooths the erratic price action and lessens the effect of short-term fluctuations. This helps the analyst focus on the main underlying movement or trend.
The most basic and popular is the simple moving average. It is calculated by a simple arithmetic mean equation:
SMA(n) = (Pr1 + Pr2 + ... + Pr(n)) / n
n = Number of periods
Pr = Price (usually closing price)
To calculate the 10-day moving average:
Another popular type is the exponential moving average. The exponential moving average equation gives more weight to the most recent prices, making it more responsive to recent price changes. It is said to be faster than the simple moving average.
Choosing the Right Period
Using the 10-day moving average is simply like having the general direction for the past group of 10 days. Choosing a short period will represent the short-term trend, while using a longer period (i.e., 200 days) will give a longer-term view.
Moving averages are better used on longer-term time intervals. They provide the analyst with important information:
⚠️ Warning: Sideways Markets
Be confident that a directional trend exists before using a multiple moving average crossover signal. These crossovers will result in many whipsaws if the price is trading sideways.
[Image: Chart showing moving averages acting as support and resistance]
Image: Moving averages example with price interaction