Investors in equities, commodities and the currency market all agree that one of the most important rules for traders to understand, is that the trend is your friend. Trend lines, regardless of the time frame, show you the direction the market price is moving at a particular time. Very seldom is it wise to place a contrarian trade when properly drawn trend lines are in place. For example, if the market is trending up then your trading strategy should be based on buying and not selling.
Properly drawn trend lines show the current direction of price movement and provide support and resistance levels for a particular price. Entrance and exit points for trades can be based on movement toward and/or away from current trends. Protective stops may also be placed just below the trend line due to the psychological pressure that the market takes note of, as it approaches a trend line.
Drawing trend lines in extremely volatile markets is a skill best left to professional traders. However, you can develop them on your charts very simply by following just a few simple rules. When market prices for a certain commodity are moving up, there will be times when the price swings lower. These lower swings should be connected by a line, thus marking a particular trend. Properly drawn, a trend line should have at least three swings before that trend can actually be developed. Conversely, when prices are moving down for a particular commodity the occasional upward swing will develop the top of the trend and should be connected in the same manner as prices move lower.
The validity of a trend line is confirmed each time that the price touches it and then bounces away in the opposite direction, which means the price will continue to move in the direction of the trend. Many strategies are based on price movements breaking below the trend line and marking a change in the direction of the market. However, it is worth noting, that this one technical indicator should never be considered a guarantee of market reversal.
In conclusion, remembering that the trend is your friend will allow you to place trades that have a higher possibility of success in all stages of your trading career, which means that you will more than likely make more profit in the long-run. Making contrarian trades without a proper understanding of the fundamental workings of the market and current technical indicators is a sure way to lose money quickly and this will only ensure your failure in the long-run. Trend lines are often the best way to understand price movements and to set up entrance points as well as protective stops, for all your trades. You should never underestimate the use of them, as they are a very important part of technical analysis and are used by the vast majority of successful traders and investors in the Forex market, including the professional ones. Fortunately nowadays, it is considerably easier to use and implement trend lines into your Forex trading. Many online Forex brokers and websites will be able to provide you with all the customizable charts, graphs, tools and software that you will ever need.