A trend line is drawn on the chart for predicting the general direction of the corresponding pair. These lines will help you in finding out the reversal of the ongoing trend. Experienced forex traders use these to find out the perfect entry and exit points. These lines could also be used to find out the stop loss positions. Sure, it sounds sweet, but like the other tools, you should not depend only on the trend lines for making your trading decisions.
One of the major problems of this type of chart is to place it right. This charting format could be of two kinds- bullish and bearish trend lines. When you are identifying a bullish trend line, it should include at least two low points. The first leg must be located below the second leg. On the other hand, a bearish line requires at least two high points. Here, the first leg should be higher than the second leg.
Therefore, for placing a trend line, you need two different low or high points. Once you got them right, connect them and extend them both ways. You have just drawn a trend line. However, you need to click the line with another high or low point to confirm the trend line. Once your trend line includes three valid points, your trend line is ready to roll. The price will touch the line every now and then, making different support and resistance levels on the way.
If you are a novice forex trader, you have likely heard the saying that the trend is your friend. To find or identify an upcoming trend, you can make use of some tools. Among them, one of the most popular is the Parabolic SAR. The term SAR means Stop and Reverse. This special indicator provides you with hints when a trend is coming to an end and when the trend is reversing.
The Parabolic SAR appears as a dotted curve in your trading chart. When the dots are on top of the bars, it is a bearish market, and when the dots are below the bars, it should be a bullish market. Some make it as simple as when the dots are located on the top, it is the perfect time for going short, and when the dots are below, you may start placing long orders.
Rather than using this indicator to find an entry point, professional traders use it to determine when to set trailing stops or exit the trade entirely.
Nonetheless, you should not depend on the indicator solely for ensuring trends. While this indicator works perfectly during strong trends, it provides false signals during consolidation periods and ranging markets. You should use your own strategy to confirm new trends and get on the trend on your own terms. Use the indicator for exiting an almost finished trend. By using this indicator wisely, you can avoid most of your losing trades.