The primary purpose of studying charts is to identify the trends at the earliest. Always remember the mantra ’Trend is your Friend.’ It is wise to assume that the trend is likely to continue rather than reverse. The movement is the general direction of the market. It indicates whether the demand is increasing or supply is decreasing, sequentially. The market does not move in a straight line; it is characterized by a series of highs(peaks) and lows(troughs).
The higher lows of an uptrend or the lower highs of a downtrend can be connected through a line known as a trendline. A minimum of 3 points needs to be connected to form a trendline. The slope of the trendline should be between 15 degrees to 30 degrees for it to sustain for a more extended period. If the slope is more than 30 degrees, the momentum can’t be supported by price action.
Trendline serves a dual purpose – continuation and reversal. A trader initiates a long trade whenever the currency pair touches the trendline. Likewise, when the trendline breaks, it indicates a trend reversal, which indeed leads to a significant selloff.
According to the first rule, as price approaches an uptrend line, the trendline (if it’s a valid one) tends to act as a support, so one could buy as price approaches the trendline. The line must not be breached. If a trendline is cut through, then we can say in effect that support has been breached, and we could act as we would if it were a regular support break.
Conversely, downtrend lines tend to act as resistances. One could sell as the price approaches the line — again, it must not be breached. In the chart immediately below, you will notice our entry points would be chosen with this in mind, providing ‘cheaper’ buy-in levels in an uptrend, nearer the trendline; and in a downtrend, providing higher levels to sell into a downtrend.
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