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 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 types- bullish and bearish trend lines. When you are placing 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, in order to confirm the trend line, you need to connect the line with another high or low point. 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, it is likely that you have heard the saying that the trend is your friend. In order 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 is used to provide 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 makes it as simple as when the dots are located on top, it is perfect time for going short and when the dots are below, you may start placing long orders. Rather than using this indicator for finding an entry point, professional traders use it to find out when to set trailing stops or exit the trade entirely.