Understanding the trend
To simplify things, use the charting function in your platform to calculate the trend line. Then, use the information reflected in the chart itself to determine the support and resistance levels. In particular, pay attention to the engulfing candlesticks to signal the reversal in trend as the currency pair trades within its range.
At this point, it’s important to keep in mind that even though you have see-sawing action in the price movement, the trend line will ultimately determine if it is a bullish or bearish trend. As always, it’s important to analyze charts that contain 24 to 48 hours’ worth of data. Nevertheless, you can look at longer timeframes for the sake of spotting similar patterns.
Some investors like to take a look at a weeks’ worth of data in order to establish recurring patterns. In such cases, it could be that the specific time window you are looking at does not reflect the trend in the market. While this is rather uncommon, it is possible that you are looking at a period that highlights unusual trading activity.
It should also be noted that trend is very short-term in the case of FOREX. Unlike stocks, FOREX investors live in the present, so to speak. Stock investors look at 20-day, 50-day, and 200-day moving averages. These are clear indicators of where the valuation of a stock may move. In the world of FOREX, things can turn on a dime, especially in times of uncertainty. As a result, you need to focus on the most up-to-date information.
Nevertheless, trend is clearly visible over longer time periods. So, it’s worth analyzing longer timeframes for the sake of confirming your assumptions. Additionally, if there are relevant events going on in the world around you, it might be worth taking a closer look at trends well beyond the 48-hour period. It could be that price action was trending in one direction but suddenly reversed as a result of unforeseen events. In this case, think of events such as terrorist attacks, large company bankruptcies, or major political events.
When trendline confluence occurs, you could be setting yourself up for an explosive gain (a breakout), or you could be heading down for a sharp decline (a breakthrough). Thus, understanding the points in which you anticipate confluence may set you up for success or save you from getting hammered.
In this section, we are going to look at three cases of trendline confluence.
- Support level confluence
- Resistance level confluence
- Countertrend confluence
All of these cases use the trendline as the principal means of determining the trade setup while also ensuring that you enter or exit at the appropriate point. So, let’s take a look at these setups in greater detail.