Using Trend-line Analysis in FOREX

Wikipedia defined the word trend as: 1) "the process of getting others to follow/copy, of their own free will your actions and/or style"; 2) "In statistics, a trend is a long term movement in time series data after other components have been accounted for"; and 3) "In market trends, it is a prolonged period of time when prices in a financial market are rising or falling faster than their historical average, also known as 'bull' and 'bear' markets, respectively." Definitions two and three better defines the use of trends in foreign exchange, and in layman's term, trends are the "trader's best friend."

There are several strategies and techniques that may be used in analyzing trends to get the most out of trading profits. In any markets, trend analysis is very important and the same applies with forex markets. Currencies in the world have the propensity to move in trends because of the different macroeconomic factors such as global trade and interest rates, international policies, and effects of political movements.

Let us be more precise here. Trend in forex may be described as a foreseeable response to price at its own level of support or opposition over a period of time. To illustrate, prices recover when they are near the apex in an upward trend. However, in a down ward trend, the opposite happens - reversals to price increase happen when it is near the opposition levels. This is, in fact, the first tool in identifying a trend - to determine opposition and support levels. This is called the trend-line examination.

Trend-line examination is frequently underrated. Some analysts say that much subjectivity is used into it and that it is retrospective. There is some grain of truth to those criticisms but they fail to notice the truth that trend-lines aid concentration on the essential price designs, weeding out extraneous factors in the market. Thus, we can say that trend-line analysis must be the first process to ascertain the being of a trend. Following such, if trend-line analysis does not show the existence of a trend, then probably, there is none.

Trend-line analysis may be best utilized using longer series of time say, daily to weekly. After this, we may carry them over into hourly timeframes where levels of support and opposition may be ascertained. This methodology has the benefit of providing more prominence to the more significant aspects in trends first rather than the less important details. Using this method, a trader reduces the risk of following a temporary leg up in the trend and missing a major long-term upward trend.