Introduction to Basic Trendline Analysis is a four part series on how to trade the markets using the technique of fundamental analysis, technical analysis and trendlines. This article will explain the importance of Fundamental Analysis in setting and trimming your trades, and why you should only trade with the best traders and look for indicators and signals to enter and exit trades. It shows the importance of Fundamental Analysis to Forex Trading, and why so many new traders choose to use technical indicators instead. And finally, we discuss the use of simple trendlines in combination with other tools, and how to develop a trading system that maximizes your trading results.
There are times when many traders lose their money through bad trading strategies or implementation of “salesmanship”. Many would argue that a lot of newcomers to the Forex market do not have the necessary background and expertise in the technical aspects of trading systems, and as a result they lose money rather quickly. While this may indeed be true in some cases, there is much merit to the case that some trading systems work better than others. As such, we will try to set up an environment where newcomers to the markets can get the proper instruction and training in order to maximize the profits from their trading systems. We hope that you find this introduction to Basic Trendline Analysis helpful and educational.
In this first installment, we will examine the fundamentals of basic trendline analysis. What is a trendline? A trendline is a horizontal line drawn from the closing price of a chosen price over the mid-point price action of a trend. By drawing a line from the low price to the high price, we can determine the direction of the trend – up or down. We can use this information to determine where to enter trades and also where to exit trades in the event of a reversal in direction.
The primary tool in trendline analysis is moving averages. Moving averages is simply a tool for indicating price action over time. In order to draw a trendline, you must use moving averages as well as other indicators of market direction. For instance, the Simple Moving Average Convergence (SMA) is the best indicator for guiding traders with little or no experience in trendline analysis. SMA’s are particularly useful for day traders who need to trade multiple times a day.
While the concept of trendline analysis is relatively simple, determining which form of analysis is best for you can be somewhat more difficult. Moving averages can be used to indicate both tops and bottoms for any given time period. It is important to note that these trends will be different for every trader. If you want to trade a longer term trend, it is best to use other indicators, such as the oscillator. Some traders like to use the divergence as their main indicator of support and resistance levels.
The basic function of moving averages is to adjust the slope of a line. As you probably know, moving averages are used in Forex trading as an indicator of the most accurate information. This type of trendline is called the Simple Moving Average Convergence or SMA. Trading using the SMA is very convenient because it is easy to use, but it does not provide information about current price action. Using other methods such as the moving average convergence divergence or MACD, you can get a better picture of how prices may change and the range of possible future activity.
There are a number of indicators that are commonly used in trendline analysis. The Simple Moving Average Convergence or MACD uses two types of moving averages – the MACD function uses the arithmetic mean of the price data over a period of time, and the divergence uses the arithmetic divergence of the price data to indicate the support and resistance levels. Other common indicators include the Stochastic, Relative Strength Index (RSI), and the exponential moving average. You can learn more about price movement patterns using these and other tools by consulting some of the many online trading resources.
Although you probably have a basic idea about what this form of analysis looks like, you might not know much about the best ways to interpret the results. To get the best value out of your trading, you should only use moving averages in conjunction with other trendline tools and indicators. It should not be used as a standalone indicator. When you learn more about trendline strategies, you will also gain an understanding of why they are among the most important tools for your technical analysis toolkit.