In the forex market, price movements are driven by buying and selling pressure. Currency rates rise when there is more demand than supply, and fall when supply outstrips demand. In general, prices move to the level where there is an equal number of buyers and sellers.
There are three types of trend in the forex market:
- Bullish or upwards trends – the price is rising
- Bearish or downwards trends – the price is falling
- See-saw or flat trends – the price is moving up and down but has no definite direction
- Each significant peak is higher than the previous one
- Each significant trough is higher than the previous one
A correction is when the price moves in the opposite direction to the current trend, but does not move enough to break the trend. This can happen when investors take profits. Once a correction is completed, the price starts to move in the direction of the trend again.
There are three types of correction:
- Upwards – the price rises during a downwards trend
- Downwards – the price falls during an upwards trend
- Sideways – the price moves sideways during an upwards or downwards trend
Building trend linesTo build a trend line, you need pivot points. These are points on the graph where the price reaches a maximum or minimum:
- Pivots at price maximums are upper pivots
- Pivots at price minimums are lower pivots
Trend lines are drawn through pivot points; one line is drawn through the upper pivots and another one is drawn through the lower pivots.
Figure 1 shows a chart with two trend lines:
- The upper trend line is drawn through three pivot points
- The lower trend line is drawn through four pivot points
Figure 1. Trend Lines
Support and resistanceTrend lines become more firmly established as more pivot points are added; this happens when the price reaches a maximum or minimum on the trend line. In this case, the trend lines may represent support and resistance levels, and the trend lines form a trading channel. The upper trend line is a resistance line and the lower trend line is a support line. If the price moves outside the trading channel, the function of the trend lines changes:
- The upper trend line becomes a support line if the price rises above it
- The lower trend line becomes a resistance line if the price falls below it
Figure 2. Upper Trend Line Becomes a Support Line
Multi-pivot trend lines
You can also draw a trend line by connecting upper and lower pivots. With this technique, the price often hits the trend line and bounces off, creating a corrective movement and an additional pivot point. Trend lines with more than two pivot points are known as multi-pivot trend lines.
Figure 3 shows the start of a correction at the points marked by rectangles.
Figure 3. Multi-Pivot Lines
Median trend linesA median trend line is a trend line that falls between the upper and lower trend lines. This type of trend line was first introduced by Dr. Alan H. Andrews. Andrews developed the trend line by borrowing concepts from physics:
- All natural cycles tend to return to their centre point
- For every action there is a equal and opposite reaction
Andrews believed that prices returned to their median trend lines about 80% of the time. When the price does return to the median trend line, it often makes small oscillations around the line.
To create a median trend line, do the following:
- Select an upper and a lower pivot point at the start and end of a price swing
- Join the two pivot points with a line
- The mid-point of this line is the first pivot point of the median trend line
- Select another pivot point that occurred prior to the price swing
- Use this as the second pivot point for the median line
Figure 4. Building a Median Trend Line
Trend line characteristicsTrend lines are characterised by the following:
- Longer trends are more powerful
- Steeper trends are stronger but shallow trends often last longer
- Trends that hit support and resistance lines frequently but can’t break through are likely to reverse
- A trend has changed when it breaks through resistance and the upper trend line becomes a support line