Correct identification of the forex trend determines your trading success. How to do it right? How can you identify the trend by means of highs and lows? How do you construct Thomas DeMark's trendlines? What do inside trendlines mean? Do moving averages really help traders? You will learn the answers to all these questions in this article!
One definition of an uptrend is the alternation of higher highs and higher lows. In fact, an upward trend is not broken until the previous relative low is not broken through. When it occurs, it is a warning that the trend may be broken.
However, it must be noted that the interrupted sequence of higher highs and higher lows should be considered as one of the possible signals, rather than an absolute signal of a long-term uptrend reversal.
The same is with a downtrend. Upward and downward trends are often marked with straight lines in the charts. An upward trendline connects a series of lows; a downward trendline connects a series of highs. The trend may continue for years. For example, the gold uptrend had been developing for almost a decade.
The following rules are applied to the trendlines and channels:
Channels and trendlines are quite efficient in the market analysis, but their importance is often exaggerated. It is easy to overestimate the predictive power of trendlines when they are applied to the price chart after the fact.
It is often overlooked that during the development of an uptrend or a downtrend, these lines need to be seriously adjusted.
The above example means that the trendline breakout is rather a norm than an exception. An important fact is that the trendlines should be broken through during the process of their changing, and so, the trendlines are often adjusted when they are projected.
This observation suggests the following conclusion: chart analysis is far more efficient afterward than in real-time, and the trendline breakout is often a trap for speculators.
The author of this theory correctly noted that drawing trend lines is a random process. In any chart, different traders will draw lines in different ways. And even the same person will draw the trendlines in the same chart differently at different times.
The reason for this ambiguity is simple. The trend line, as a rule, connects a number of relative highs and lows. If there are two dots, you can draw a line quite accurately.
But if you connect 3 or more dots, as is usually the case, then you can draw accurate trend lines only in the case of strict linearity. In fact, the drawn trendline will exactly meet one or two relative highs or lows, missing the others. “Correct” trendline is only imagined by the trader, looking at the chart.
The author of the idea admits that to identify the trendline more or less clearly and accurately, it must be based on two points alone.
DeMark notes that you need to draw the line not from left to right, but from right to left, as the current price action is now more important than its movement in the past.
Common trendlines, as a rule, are drawn through price highs and lows. But there is an opinion that the price extremes correspond to short-term movements, associated with excessive emotions among participants in the trading process, and therefore, these points may not correspond to the true market trend.
Inside trend lines make it possible to bend the implied requirement of drawing trend lines through graphic extremes. Inside trendline is drawn near the majority of relative highs or lows and completely ignores the highest or the lowest values. Differently put, the inside trendline may be seen as an approximation of linear extreme points.
In fact, there are several ways to draw the inside trendline in the chart. But still, the experience has proven that inside trendlines are far more efficient than standard trendlines in identifying potential support and resistance zones.
The analysis shows that the inside trendlines, as a rule, better indicate where the market would stand the drop and would stop at the price surges.
Certainly, this series of examples does not prove a clear advantage of the inside trendlines over the standard ones, since you can always find charts that can prove any theory, and such proof is not implied or suggested here.
The comparisons given in these charts are described to explain to the traders that the inside trendlines will better indicate the support and resistance zones.
If I believe that inside trend lines are far more efficient than common lines, it then it does not yet mean anything. Observation of a curious speculator cannot serve as scientific evidence.
Taking into account the subjectivity of the inside trend lines, it will be difficult to test their reliability. But still, inside trendlines are worth the attention of a reasonable chartist. I believe that a speculator, reading the inside trendlines, will achieve better results than identifying standard trendlines. Continue reading with Litefinance.com...