Trend Lines

Trend A trend depicts the general direction of the market. The direction might be up (bullish) or down (bearish). Major trends have three distinct phases:

• Accumulation
• Public participation
• Distribution

The accumulation phase represents the first part of the trend where those who are well-informed buy or sell. In other words, if the well-informed recognize that the recent downtrend (or uptrend) will soon come to an end, they would buy, and vice versa.

During the public participation phase the masses follow the major trend (jump on the band-wagon). This occurs as prices begin to accelerate rapidly and economic news pushes the currency pair in the direction of the trend.

The final distribution phase occurs as the economic news highly favors the current trend, and volume and public participation increase even further. At this point, the well-informed traders - who entered early and are well into profit - begin to close their positions (take their profits by selling or buying) before other investors begin to follow suit.

 

A Trend is assumed to be in effect until it gives definite signals that it has reversed. In other words, a strong trend will likely continue in its current direction unless technical or fundamental analysis indicates a price reversal.

Trend lines Trend lines are lines drawn on price charts, showing where the market is heading. With charting software trend lines are easily drawn.

Traders disagree on how these lines should be drawn.

Some say that in an up trend, a trend line should connect the relative low points on the chart. A line connecting the lows in a longer-term rally will be a support line that can provide a floor for partial retracements.

Here is an example of such a trend line.

 

The down trend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher (support and resistance will be discussed in the next section).

Here is an example.

The best trend line? It all depends on your strategy.

Our trading strategy uses trend lines that connect the highest and lowest prices of the trend. Any other method would produce less profitable results.

This is what our trend line looks like.