Graphical analysis – the use of levels and lines makes it possible to predict the price behaviour in the market.
Levels and lines are the main tools of the graphical analysis.
The level is a definite barrier that cannot be cleared by the price.
There are support and resistance levels.
The level is always horizontal. Only one pivot point is needed to build it.
This makes it different from the line.
The line is always inclined. Two pivot points are needed to build it.
There are only two methods of working with the levels.
Open positions when returning from the level.
And open positions when breaking through the level.
Levels also serve for profit taking and for buying in unprofitable deals.
So, there are three basic rules for working with the levels and lines.
- Opening order shall be set next to the level or the line
- Stop Loss order shall be set behind the level or the line
- Take profit order shall be set in front of the level or the line that serves as a target for them
If there is a trend in the market, then one may talk about the trend lines and the channel lines.
A trend line is always stronger than a channel line.
But let’s analyze what the trend is first.
A trend is the directional movement of prices in the foreign exchange market.
The trend can be downward and upward
In an upward trend, every next maximum is higher than the previous one.
In a downward trend, every next minimum is lower than the previous one.
In a downward trend, a trend line is a resistance line,
And the channel line is a support line.
It’s vice versa in an upward trend. A trend line is a support and the channel line is a resistance.
Why is it important for us to know where the trend line is and where the channel line is? That’s because the trend line is always stronger than the channel line returning from it or breaking through it will be more reliable.
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