Forex Trading System- Trend Lines

SUPPORT AND RESISTANCE

A support level indicates the price at which most traders feel that prices will movehigher. There is sufficient demand for a security to cause a halt in a downward trend andturn the trend up. You can spot support levels on the point and figure (P&F) charts bylooking for a sequence of daily lows that fluctuate only slightly along a horizontal line.When a support level is penetrated (the price drops below the support level) it often be-comes a new resistance level; this is because traders want to limit their losses and willsell later, when prices approach the former level.

Like support levels, resistance levels are horizontal lines on the P&F chart. Theymark the upper level for trading, or a price at which sellers typically outnumber buyers.When a resistance level is broken and the price moves above the resistance level, it of-ten does so decisively.
The area between the support line and the resistance line is frequently referred toas the security’s current trading range. (See Figure 13.1.)

TREND LINES

A trend can be up, down, or lateral and is represented by drawing a straight line abovethe highest Xs in a downward trend and a straight line below the lowest Os in an up-ward trend. (See Figure 13.2.)

A common trading technique involves the intersection of the trend line with themost recent prices. If the trend line for a downward trend crosses through the most re-cent prices, a buy signal is generated. Conversely, if the trend line for an upward trendpasses through the most recent prices, then a sell signal is generated.

BUY SIGNALS

Many traders feel that when a downward trend line crosses through a vertical column ofXs, a buy signal is generated. The market entry point is the first X that is above the high-est X in the previous column of Xs. (See Figure 13.3.)

SELL SIGNALS

The converse is true regarding an upward trend line crossing through a column of Os;that is, a sell signal is generated. The market entry point is the first O that is below thelowest O in the previous column of Os. (See Figure 13.4.)

We recommend that traders confirm trend lines’ buy and sell signals using other for-mation signals before entering the market. Paper trading is the safest way to hone one’sskills at signal identification.