Posted by forex at 4:27 AM
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1. Open your Forex charting software and create a price chart for any currencies you wish. In Forex, you chart 'currency pairs,' which show an exchange rate between any two currencies.
2. Identify the peaks and valleys on the price chart. These are the 'pivots' where the exchange rate reversed its direction, even if temporarily. For example, if prices are moving higher and then start to decline, this leaves a peak called a 'high.' Similarly, if prices fall and then reverse higher, this forms a 'low.'
3. View the most recent price action on the chart, and find the most recent high that formed. Then identify the previous high that formed before the most recent high. Similarly, find the two most recent lows on the chart. If the chart clearly shows all these as a pattern of 'higher highs and higher lows,' you can safely identify this Forex currency pair as in a solid up trend.
4. Buy into the trend if it shows this up trend pattern. However, if instead you see a pattern of 'lower highs and lower lows,' this is a solid down trend. These simple patterns are the basis of trend recognition techniques, first outlined by Charles Dow in the 'Dow Theory' nearly a century ago. Today, traders continue to use this technique to identify trends.
5. Draw a straight line on the price chart, connecting all the recent lows, if you see what appears as an up trend. These 'trend lines' are an additional aid in identifying trends. If the trend is declining, instead draw a straight line connecting all the highs. In solid trends, it is easy to draw or imagine a straight line on the chart, and some charting software lets you draw directly on the chart.