Thursday, January 17, 2008

Forex Trading Style - Trendlines Versus Horizontal Lines

In developing a personal Forex trading style it is likely a trader will experiment with numerous technical indicators over time but eventually end up with just a handful of favorites which are used on a daily basis. The use of trendlines is taught in just about every training course out there and popular opinion seems to suggest they should take a reasonably prominent place in any successful Forex trading style. This article begs to differ. Yes, trendlines can be useful but in my opinion they are superseded by horizontal lines. What is the difference? Trendlines are simply lines drawn across the lows of bars or candles in an uptrend, or lines drawn across the highs of bars or candles in a downtrend. One Forex trading style may use the Tom DeMark method of drawing trendlines which gets very specific by joining the most recent low with the previous lower low (looking left on the chart) and then extending the line forward (looking right on the chart) for an uptrend. For a downtrend join the most recent high with the previous higher high (looking left on the chart) and then extending the line forward (looking right on the chart). These trendlines then give indications of a breakout once they are broken. Horizontal lines are simply lines drawn across highs and lows on a chart marking support and resistance. Why are horizontal lines superior? The ideal Forex trading style is simple and easy to use and it helps if the charts we are studying are clear and reasonably uncluttered. Drawing numerous trendlines can obscure what is really happening with price action. True, some traders just draw trendlines across main highs and lows and ignore the mini swings. Nevertheless, trendlines have to be constantly re-drawn and updated as price action continues. On the other hand, just putting in a horizontal line on key levels of support and resistance is simple and easy to see. They have great significance on the higher time frames, especially the 4 hour or the daily charts. Of particular value is marking the previous day s high and low and watching price action around those levels. It is possible to catch 10 to 20 pips often as price tests the previous day s high or low and pulls back. Of course, the probability of a successful trade becomes higher if the previous day s high or low also coincides with other factors such as a Fibonacci level or pivot point. Why are horizontal lines probably more significant than trendlines? When developing your Forex trading style it is very important to look beyond candles. Trading is much more than that. The successful trader understands what is going on behind the scenes. Candles and price action is simply an outward manifestation of what is happening across the desks of thousands of traders across the globe who deal with billions of dollars worth of flows and orders. A previous high or low in price action, especially on the higher time frame, means that the bulls or the bears won the battle in that trading session. If a number of traders committed a large amount of equity to a currency at a certain price, then obviously that price point is going to be fiercely defended in the future by those traders. So horizontal lines drawn across levels of support and resistance mark very real points at which we can expect a reaction from price. Trendlines on the other hand tend to be more speculative in my opinion. Watch price reaction at horizontal lines of support and resistance as opposed to trendlines and you will notice that price respects key levels of support and resistance more often than trendline levels. Should trendlines be included in your Forex trading style? That is an individual matter. They can certainly be helpful in offering confirmation of a trade after taking into consideration other factors. But to trade on trendlines alone can be very risky. On the other hand, it is possible to trade almost entirely on what support and resistance tell you at certain times when key levels are being tested. Generally though, a successful Forex trading style will combine a number of factors. My favorites in order of importance are: Support and Resistance levels on the higher time frames Fibonacci retracement and extension levels Pivot points Candle patterns 200 EMA (Exponential Moving Average) If you are in the process of developing your own Forex trading style you may arrive at a different priority list. Why not experiment with horizontal support and resistance lines and trendlines and decide for yourself which gives the most reliable indication of price movement? Learn how the MACD indicator can help you avoid much anxiety: Do you know the important lesson Mohammed Ali teaches us about Forex trading? Read it here: For the best free economic calendars plus a free pivot point calculator and Fibonacci calculator click here:

No comments: