Trendlines And Containment Patterns In Forex



Posted: Wednesday, November 04, 2009

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One of the most beneficial tools to a technical currency trader is to use trend lines on the price chart to create trading channels and containment patterns, because these are future price projections that can be used in a predictive manner with a relative amount of success. Anyone who wants to be (or has already become) a successful trader knows that market analysis in a retrospective form might sound better when it is given in the form of a daily market update from a bank or trading institution, but it does not do you any good to only know where the prices have been; you need to know where they are headed in the future, where you should enter the market, and in what direction.

One of the key principles of drawing a reliable trend line on your price chart is that the price must touch the line at least three times in order to validate the strength of the trend. If the price touches only two times then this is not enough to establish a strong price trend, and the more times that the price touches the trend line and continues moving in the upwards or downwards direction then the stronger and more valid this trend line becomes. Something that is more powerful than just using a single trend line is to identify two trend lines both above and below the active price data, which will effectively create a trading channel that can signal to you if the trend is still going strong or if it is time for a trend reversal.

Creating a containment pattern on your chart can set you up to successfully execute a profitable short-term trade without the need for a trend reversal, because a containment pattern can represent the retracement of the market within the continuing scope of the larger trend. In the broadest sense, a trading channel actually is a containment pattern itself because it represents a future projection of the levels that the actual market price should fluctuate between, but this in itself might not yield any relevant market entry or exit signals. A retracement containment pattern however, where a line is drawn in the opposite direction of the overall trend based on the market retracement within the actual trading channel, can show you exactly when you should place your buy or sell order.

If you use a retracement containment pattern to determine your market entry point (where you enter the market when the actual price breaks through the retracement line), then you can use this in conjunction with a momentum indicator to determine your exit point. If you are trading in an uptrend where you enter the market at the bottom of a retracement point where the market is likely to go back up to the top of the trading channel, you can use the momentum indicator to find the right exit point where the overbought market pressure starts to reverse, since there is always the chance that the market will not actually make it all the way back to the top of the trend line channel.

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