Perhaps among the most basic of technical analysis, yet highly effective. Using Trend line Support and Resistance helps a trader target; profit taking levels, entry points as well as stops. It allows a trader to visualize trending versus ranging markets and adjust their strategies as necessary. Lastly, it enables a trader to define slope. To steep of a slope and you are witnessing a burst that will more often than not retrace at least half its gains in an equal amount of time, while a slope which is too flat may signal a loss of momentum.
Crude Oil:
In the chart below we can observe the repercussions of a steep sloping trend line. Example A shows an extremely sharply sloped Support and Resistance trend line. You can see that an immediate retrace ensues, pushing price as low as the 200 day moving average. Now lets examine our current market environment and we see a much more sustainable trend. Notice that the 50 day MA has just crossed below the 200 MA and price is having difficulty taking out the 100 MA. There are many ways one can trade this as your risk is limited based on the placement of price within your trend lines. It is very possible that both short and long traders will make money in this scenario.
USDCHF:
This is a great example to remember. You can observe the steep slope lines pushing the CHF higher immediately after it broke above the 50 day MA. If you add a faster moving average that tracks closer to price such as a 5 SMA and a 13 SMA you will notice that they do not cross until after price moves below trend line Support. This suggests that the end of the run is now complete. Once the 13 SMA crosses over the 5 SMA price falls precipitously . One factor attributing to the equally fast decline in price is the steepness of the slope leading into that move.
GBPUSD:
This example is fairly close to the desired slope/angle that you would want to see. The downside here are the long candles. Too many long candles extending from the Support to the Resistance lines indicate that either your slope is too narrow and or volatility is too high. However, current price is pushing up against trend line Resistance in conjunction with price bumping up against the 50 day moving average. This means that there is more downward pressure exerted on the Pound, but if the Pound can break above this point you should see some nice price action as the GBP will look to trade higher on the breakout. If the Pound fails to break through Resistance than you could conclude the GBP will retest Support.
Written by bforex.com
