Posted on March 5th, 2010
by Rapid Forex
I usually like to provide examples of trades that go short as well as long, bullish as well as bearish, show resistance as well as support, and downtrending as well as uptrending.
Many forex trainers just say “just flip everything upside down and it’ll work the other way…” We learn by examples, so I try to include examples of concepts both ways. You may have noticed that feature of this blog 
Earlier today I explained uptrend examples of trends and trendlines. As an appropriate follow-up, I’m going to apply the same idea to give you examples of downtrends.
Finding your inner, outer, and long-term outer trendlines in a downtrend
A downtrend (also called a downtrend price swing) is the exact opposite of an uptrend price swing.
In this case, the swing starts at a high and ends at a low.
The market is making lower highs and lower lows as prices decrease overall.
The downtrend starts high and ends lows
If you have identified that the market is in a downtrend (the market is making lower lows and lower highs), you should draw all three of your trendlines before making a trade. Generally speaking, you will draw a downward trendline across the levels of resistance (highs) as long as the market is making lower lows and lower highs.
To draw the inner downward trendline, locate the last two levels of resistance (beginning from the current market price at the right of the chart) and draw your trendline between those two levels, extending it forward and down to the right.
Remember that if the market is no longer making lower lows and lower highs, then the market is no longer in a downtrend and you will need to identify a new trendline. This is important to recognize because it could signify a trend reversal.
To draw the outer downward trendline locate all of the levels of resistance on your chart, beginning from the left side. Draw your trendline across those levels of resistance, extending it forward and down to the right.
To find the long-term outer downtrend you will need to look at a longer time frame, as you would in identifying the long-term outer uptrend. For example, if you locate your inner and outer trendlines looking at 5-minute candles, switch to a 60-minute candle chart to find the long-term outer downtrend.
When the inner trendline is broken it is likely that the market will move to the outer trendline. This holds whether the broken trendline is the inner trendline (the market would then move to the outer trendline) or the outer trendline (the market would then move to the long-term outer trendline).
Notice how there are a fan of three trendlines moving down?
Trading trendlines in a Downtrend
To trade an inner, outer, or long-term outer downward trendline, sell when the market hits the trendline, making sure to set your protective stop loss order at the last appropriate level of resistance.
As with an upward trendline, the inner, outer, and long-term outer downward trendlines may converge. This offers you a double-strength signal. In this case you have two good reasons to believe that the market will bounce.
My next post will give you some quick rules for trading trendlines. Have a fabulous weekend!
Posted in
Technical Analysis
Posted on March 3rd, 2010
by Rapid Forex
Just as there are rules for trading Japanese candlesticks, there are also several rules you need to follow if you want to make wise trading decisions in the Forex market.
These rules are:
- Draw your support and resistance lines.
- Draw your trendlines. Remember: trade in the direction of the trend, because the trend is your friend. You want to be able to identify if the trend has been broken because you likely want to exit at that point.
- Decide whether you will go long or short (based on overall trend direction).
- Appropriately place your stop loss orders. For information on how to place stop loss orders when trading on support and resistance levels, see above. If the stop is too far away from your entry point the risk may be too great and you should consider passing on the trade.
- Create a plan. Trade the plan. Traders get in big trouble when they become emotionally invested in a particular trade and so hang on too long to a losing trade. Even if you follow all of the trading rules and trade all of your indicators correctly, you will lose on some trades, just as any business takes losses as well as profits. By sticking to your trading plan you will maximize your profits and minimize your losses.
Past Resistance Levels can become Future Support Levels
As you read earlier, a bull wants to see the market achieve new highs, taking out previous levels of resistance and a bear wants to see the market taking out previous levels of support.
Sometimes past levels of resistance can turn into levels of support. This happens when the market has broken a the current level of resistance, but before it goes on to break the next level of resistance it bounces (bottoms) at the first level of resistance, which then becomes a level of support.
Eventually the market will break the support level (once a resistance level) instead of bouncing there, indicating a trend reversal. To trade in this situation, buy at the support levels and set your stop loss order at the last support.
See how the previous resistance level became a new support?
Past Support Levels can become future Resistance Levels
Past levels of support can also turn into levels of resistance. This happens when the market has broken the current level of support, but before it goes on to break the next level of support it bounces (tops) at the first level of support, which then becomes a level of resistance.
Eventually the market will break the resistance level (once a support level) instead of bouncing there, indicating a trend reversal. To trade in this situation, sell at the resistance levels and set your stop loss order at the last resistance.
See how the old support level becomes a new resistance level?
That concludes my basic overview of support and resistance for forex trading. This topic will come up when explaining future trades, so make sure you review the basics about support and resistance in the forex market until you fully understand them.
Posted in
Technical Analysis
Posted on March 2nd, 2010
by Rapid Forex
By now you should start to be understanding a lot about japanese candlesticks and how to use them in patterns to trade. I’m continuing to explain these patterns to you so you become a proficient forex trader. Soon, I’ll be showing you how these patterns are used in actual trading, but you need the theory first.
The second candlestick pattern that can be a very useful tool in spotting potential trend reversals is the tweezer top (and it’s partner, the tweezer bottom).
The tweezer top formation, as its name suggests, reveals the end of an uptrend and the beginning of a downtrend (a top).
A tweezer top formation has the following characteristics: two or more candles (dojis or spinning tops) of roughly equal height with long upper wicks (the wicks must make up at least 60% of the entire candle). The two (or more) candles can be bullish, bearish, or a combination of both.
Notice how the top of the wicks align to form a tweezer top uptrend reversal signal
If you identify a tweezer top and decide to trade it, sell at the opening of the candle that follows the second high candle in the tweezer top formation.
Forex Tip: Set your protective stop loss order at the last level of resistance (which will be the tweezer top’s high).
As with any indicator, trading on a convergence increases the probability that you will profit from your trade. If you spot a tweezer top, look for the trendline break or another indicator to provide more reason to believe that the market is reversing.
Can you guess what’s coming next? The tweezer bottom is the upside-down version of the tweezer top. The more examples you see of these candlestick patterns, the more useful they will be to you.
Posted in
Japanese Candlesticks, Technical Analysis
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