Trendlines
06/26/12

As for the trading tolls, we can say for sure that there is no single super smart instrument that can give you a fortune in a matter of minutes. The best solution here is to use a combination of different instruments in order to find the favorable market forces allowing to get a maximum number of high probability trades within a specified period of time. One of the most popular market trading tools is called Trendlines, and many experts gave their testimonial for it.

Trendlines are a very effective instrument for trend identification. It represents a straight line connecting two or more price points and then extending it into the future for you to follow You will see the lines drawn across considerable lows in an uptrend, along with considerable highs in a downtrend. In order to classify trendlines, experts divide them into three types:

  1. Short Term
    These lines are drawn across the latest two lows in case of an uptrend or across the latest two highs in case of a downtrend. The best observations can be found on a smaller time frame like 15 minute or 30 minute chart.

  2. Medium Term
    These lines are observed on a bigger time frame, such as a 60 minute chart. It will connect the nearest considerable low to current price action to the previous considerable low in case of an uptrend In the same manner, it will connect the nearest considerable high to current price action to the previous considerable high in case of a downtrend.

  3. Long Term
    This one will use larger time frames, such as 4 hour chart or even the daily chart to draw long term trendlines in the same manner as with Medium Term lines. These lines are regarded as an effective market trading instrument The daily chart is usually used by traders of big companies who don’t normally engage in small moves on an intra day level.

When you draw a trendline on a daily chart, you are then able to graphically analyze where the price currently is and where it’s likely to bounce. However, the traders should employ trendlines as a market trading tool with caution and discretion. If you cover your charts with every possible trendline, it will lead to confusion and blurry analysis.

It is also not a great idea to rely solely on a short time trendlines, because they can merely give you a defined picture of current price action, which are often broken during the day. In fact, their main use is to provide you with a clear, easily recognizable graphical representation of current price behavior.

In case you notice that the price is coming back to test a trendline on the bigger time frames, you should look at other factors. You can try drawing in horizontal lines to see key support and resistance through previous highs and lows. You can also draw Fibonacci retracement and extension levels, find out the daily pivot points and locate them on the chart as well




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