Forex Walkthrough


Level 3 Trading - Chart Basics (Trends)

When a collection of data points are plotted on a chart, you may start seeing the general direction in which a currency paid is headed towards. In some cases, the trend is easily identified. For example, the chart clearly shows that the currency pair is rising over time:

Figure 1

On the other hand, there will be instances where trend is much more difficult to identify:

Figure 2

Therefore, more commonly, trends tend to operate in a series of gradually moving highs and lows. Thus, an uptrend is a series of escalating highs and lows, while a downtrend is a series of descending lows and highs.

Figure 3

Figure 3 is an example of an uptrend. For this to remain an uptrend, each successive low must not fall below the previous lowest point or the trend, if it does, it is deemed a reversal.

Types of Trend
There are three types of trend: Uptrends, Downtrends and Sideways/Horizontal Trends (The latter occurs when there is minimal movement up or down in the peaks and troughs). Some chartists consider that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction.

Trend Lengths
Along with these three trend directions, there are three trend classifications that have to do with time duration in which the trend is taking place. A trend of any direction can be classified as either a long-term trend, an intermediate trend or a short-term trend. For forex trading, a long-term trend is composed of several intermediate trends. The short-term trends are components of both major and intermediate trends.

Take a look a Figure 4 to get a sense of how these three trend lengths might look.

Figure 4

Trendlines represent a charting technique, which a line is added to represent the trend in a currency pair. Drawing a trendline is as simple as drawing a straight line that follows a general trend. Trendlines can also be used in identifying trend reversals.

As you can see in Figure 5, an upward trendline is drawn at the lows of an upward trend. Notice how the price is propped up by this level of support. You can now see how this trendline can be used by traders to estimate the point at which a currency pair will begin moving upwards. Similarly, a downward trendline is drawn at the highs of the downward trend. This will indicate the resistance level that a currency pair experiences when price moves from a low to a high. (To read more, see Support & Resistance Basics and Support And Resistance Zones - Part 1 and Part 2.)

Figure 5

It is important to be able to understand and identify trends so that you can trade and profit from the general direction in which a currency pair is heading rather than lose money by acting against them. Now that you know a little about candlestick charts and trend, we can introduce you to one of the most popular chart patterns: Head and Shoulders.

Chart Basics (Head and Shoulders)
Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  3. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  4. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  5. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  6. Investing News

    Should You Invest in Disney Stock Before Star Wars?

    The force is strong with Disney stock, as it continues to make gains going into the launch of EP7. But is this pricey stock a good buy at these levels?
  7. Investing

    10 Cheap Vacations for the Ultimate Foodie

    If you are a foodie then explore one of these destinations in 2016.
  8. Investing News

    Silicon Valley Startups Fly into Space

    Space enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  1. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  4. Confirmation

    The use of an additional indicator or indicators to substantiate ...
  5. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based ...
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  3. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  4. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  5. What are the dormancy and escheatment rules for stock accounts?

    While the specific dormancy and escheatment rules for stock accounts vary by state, all states provide for the escheatment ... Read Full Answer >>
  6. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center