The Resistance level or area is the highest point a currency price reaches in an “up cycle” before it reverses and begins to decline (move down).

The Support level or area is the lowest point a currency price reaches in a “down cycle” before it reverses and begins to advance (move up).

Trend Lines

• In an uptrend, the trend line is drawn along the bottom of the lowest price points (the bottom of the valleys), which are also areas of support.
• In a downtrend, the trend line is drawn along the top of the highest price points (the top of the peaks), which are also areas of resistance.

Channels

• An uptrend channel is created by drawing a line that is at the same degree and parallel to an uptrend line and which touches the most recent peak (as opposed to the existing uptrend line, which touches the lowest price point).
• A downtrend channel is created by drawing a line that is at the same degree and parallel to a downtrend line and which touches the most recent lowest price point or valley (as opposed to the existing downtrend line, which touches the highest price point).

You can review the two charts below to be certain of exactly how this is done. The first chart shows just trend lines. The second chart is the same chart but with the channels drawn.

Chart with trend lines.

Chart with channels.

The next set of lessons will be about Fibonacci Ratios and how they are used in Forex trading.

OK, this is a short but informative continuation of the larger topic, “Support and Resistance.” The preceding lessons under that topic were: Support and Resistance, Trends in Forex Trading, and Trend Lines. You should be familiar with the material in those lessons before you continue.

In the previous lesson, Trend Lines, I emphasized the importance of drawing trend lines correctly and gave an example of how that is done. Now I will add another dimension to “trend line theory” and briefly talk about something called “Channels.”

If you draw a line at the same angle and parallel to both the up trend lines and down trend lines, you will have created channels.

In other words, you are drawing additional lines on the opposite sides of the up trend lines and the down trend lines.

To better visualize this, take a look at the two charts, below. The first one is the chart we used in the previous lesson, Trend Lines, and the second chart is basically the same chart with the additional lines added that were described above.

Chart with trend lines.

Chart with channels.

Click here for a final Review of Support and Resistance.

We covered trend lines briefly in the previous lesson, “Forex Trends” and will add just a bit more information here.

Trend lines can be as accurate as any other tool you can use; that is if you draw them correctly. The problem is that for various reasons, many traders do not draw them correctly.

Below, is the same chart you saw in the previous lesson. (You did read the last lesson, right?) Take a look at it again to fully understand how the trend lines have been drawn and why.

1. In an uptrend, notice that the line is drawn along the bottom of the lowest price points (the bottom of the valleys), which are also areas of support.
2. In a downtrend, notice that the line is drawn along the top of the highest price points (the top of the peaks), which are also areas of resistance.

The next lesson is Forex Channels.

What is a trend in Forex?

A Forex trend is simply the direction in which a currency pair is moving.

• Typically, the movement of currency prices is not directly up or down.
• More often than not, the movement is up or down and then some retracement before the currency continues once again to move in the direction of the original trend.
• “Retracement” is the contrary (opposite) movement of a currency from its original trend direction. In other words, the price may move up or down for a period of time and then it will reverse itself and go in the opposite direction, usually for a shorter period of time. This behavior is also sometimes called “correction” or “pullback” in addition to “retracement”
• Trends are differentiated by their direction and their duration.

Types of currency (or Forex) trends

• Uptrend: The currency price is trending upward in a series of thrusts during which the price reaches a higher level than it did in the higher thrust.
• Downtrend: It has the same behavior as an uptrend but in the opposite (downward) direction.
• Sideways: Currencies do not always trend up or down; At times, price thrusts and reactions are not aggressive enough to move the price very much in either direction. When this occurs, price remains close to its original position.

Below, you can see the thrusts and reactions in uptrends and downtrends.

Forex Trend Groups

Forex trend groups are differentiated according to the duration of the trends.

1. Major Forex trends can last from one to three years and can be followed best using daily charts. They are formed by a series of intermediate trends.
2. Intermediate Forex trends have a lifetime of three weeks to three months and can be followed best on hourly charts. They are formed by a series of minor trends.
3. Minor Forex trends complete their run in less than three weeks and can be followed best with 15 minute charts.

Most major currency-market trends are closely associated with the interest rate differential between the two currencies of a currency pair. A good example of this is when interest rates in the United States have been rising while interest rates in the European Union have been stable and we see a sustained major downward trend in the EUR/USD pair.

Here is what happens:

• Investors sell Euros that they borrow or buy in Europe with U.S. dollars at a lower interest rate.
• They can then re-lend or sell the Euros at a higher long-term interest rate in the U.S.
• It is the intensive selling of the pair that drives the price down and creates the downtrend.
• Of course, the reverse happens when U.S. interest rates remain stable and European interest rates remain high during the same time period. In this case, a major uptrend can develop.
• When a significant difference between the interest rates of the two currencies narrows enough, any major trend that may have developed will end.

For now, remember that as a general rule, if there is a significant difference in interest rates between the currencies in a pair, there is a good chance that a major trend will develop, either up or down, depending on which interest rate is rising and which remains relatively unchanged.

Forex traders use fundamental analysis to monitor and consider the various macro-economic elements that affect a nation’s economic health – including interest rates.

The next lesson is Trend Lines.

What are Support and Resistance?

Support

When see on a chart that prices are falling and then notice that when they reach a certain lower level, the price cannot seem to decline any farther, prices have reached a support level. Support is blocking the price decline.

Resistance

Conversely, when see on a chart that prices are rising and then notice that when they reach a certain upper level, the price cannot seem to advance any farther, prices have reached a resistance level. Resistance is blocking the price advance.

1. In a downtrend, price declines are blocked by support.
2. In an uptrend, price advances are blocked by resistance.
3. When price manages to break through resistance it can be expected to continue up to the next upper level of resistance.
4. If price manages to break through support you can expect it to continue to drop down to the next lower level of support.

In order for an uptrend to continue:

1. Each price thrust needs to continue upward through the level of resistance that stopped the previous price thrust.
2. Each price advance must finish at a higher support level than the previous price advancement.

In order for a downtrend to continue:

1. Each price thrust needs to continue downward through the level of support that stopped the previous price thrust.
2. Each price decline must finish at a lower resistance level than the previous price decline.

While support and resistance are widely used in Forex trading, not everyone agrees on just how to measure them. But before we elaborate on that, let’s see another way to look at them:

It is easy to see that price is, generally, moving up. It looks like a bull market. But we can also see that the price moves up only so far and then it hits a resistance point and then pulls back (declines). Each time it declines, though, it is stopped by a support level and then reverses again and starts back up again.

Of course something else is happening here as well; something important that we mentioned earlier. With each consecutive up-down-up cycle, both resistance and support levels are established at a higher level. With each upward thrust, the price breaks through the previous resistance level and establishes a new higher price point and, thus, continues its upward trend.

Simply reverse it for a downward trend.

Plotting Support and Resistance

First, you should know that support and resistance levels are not exact numbers. For example, when the market is testing price, support and resistance levels may appear broken. Candlestick charts usually indicate market tests with their shadows.

You can see that where the horizontal line goes across the chart (2500 resistance level) the upper shadows of the candles tested that resistance level. At that point, the market never broke the resistance. In the final analysis, it merely tested it.

How do we tell when support or resistance is actually broken?

There is no simple single answer to that question. Ask different Forex traders and you may get more than one answer. Some say that if the market price moves beyond a support or resistance level, then it is broken. However, others will tell you this answer cannot be correct.

Let’s take look at what happened in the above chart when the price did close above the 2500 resistance level:

Oops! It looks like the price closed above the 2500 resistance level twice but fell back both times. It was a “false breakout.” So, as you can see, caution is advised here. If you had “pulled the buy trigger” too quickly and bought this pair, you would have made a costly miscalculation. Not only was the resistance not broken; it actually strengthened some.

OK, now what can we do about this?

Well, it’s obvious that we need to somehow filter out false breakouts. The first thing is to think of support and resistance as “zones” rather than hard points on a chart. Here is where a line chart comes in handy. Remember, you can use a line chart to see only the closing prices instead of a candlestick chart, which adds extreme highs and lows – that for our purposes here can be misleading.

The reason candlestick charts can mislead us when we want to more accurately identify real support and resistance breakouts, is that sometimes what the candlesticks show us are “knee jerk” market reactions instead of clear, intentional market movements, which are exactly what we need.

Take a look at the line chart below and notice that horizontal support and resistance lines have been plotted across areas where prices have formed several peaks and valleys.

Of course nothing is infallible, but this is one way to more clearly plot support and resistance “zones.”

A couple of things to keep in mind:

1. When market price breaks through resistance, that resistance now becomes support.
2. Each time price tests a level of resistance or support without breaking through, the stronger that area (or zone) of resistance or support is.

The next lesson is Trends in Forex Trading