Thursday, 29 October 2015

Trend Lines, Real Live Forex Trading

Today we focus on solving potential problems that could occur when using trend lines in real live Forex trading. There is a difference between the “perfect theory” and real live, this part tries to bridge the gap.


At times markets move very harmonious in a trend or channel, but there are examples where price does not fit in a (trend) channel. In those cases Forex traders can either skip the pair or accommodate their lines to the ‘imperfections’ of the price movement. In this Using trend lines for connecting tops and bottoms or impulses still could be a useful practice.


In other cases the trend could be great but the channel does not fit perfectly on price action. A Forex trader can decide to ‘ignore’ part of the price movements that do not fit in the channel and place it outside of the channel. When price is outside of the channel, traders call it an over or under throw (an over throw is when price is above a channel; an under throw is when price is below a channel). The reason is that markets are riding on emotions and price can therefore extend past expected support or resistance zones. For instance, in this GBPUSD example price had one under throw and several over throws. Despite these imperfections the trend and the trend channel were in balance.


As shown above, it is possible for price to extend past a channel. The opposite is also a realistic scenario. A hit on the channel is valid even when price just misses the top or bottom of a channel. As explained in the previous articles, channels must have 3 or more hits to be a confirmed channel. A hit can be counted even if price makes an over throw, under throw or barely misses either side of the channel. The border should be around 30 pips, which means that if price is within 30 pips of the channel it can be counted as a hit. If price is 30+ pips shy of either side of the channel, then it is not counted as a hit.


At certain occasions price does not only make an under or over throw, but price accelerates in the trend and ‘expands’ the channel. In a down trend price breaks through the bottom of the channel line; in an uptrend price breaks through the top of the channel line. A channel can be narrow especially at the start of the trend. Forex traders can certainly change the channel to accommodate an expansion of a channel. In fact Forex traders can continuously evaluate and compare channels to check which one is the best (according to the rules mentioned in previous parts of the series). In some cases leaving 2 or 3 channels on the chart is OK as well. That way, Forex traders can keep an eye on multiple versions and see which one works best. 


Trend lines are great for various reasons such as: filtering out trades, support and resistance, taking break out trades, taking bounce trades, and using them as a trigger.  Forex traders can extensively use them in their trading: the sky is the limit on how trend lines can be combined in these various roles as well. For this particular part I would like to focus on the trading itself.
Trend lines are a great tool but for discretionary technical traders I recommend adding support and resistance analysis, chart patterns and candle stick patterns to any trading plan in order to make it more robust. Trading trend lines in a non-discretionary method is difficult because the trader must always draw the trend line on the chart themselves.

Reference: Chris Svorcik

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