Trendline Analysis Ebook

Trendline Analysis by Louizos Alexander Louizos, http://www.easytradeforex.
com
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Trendline Analysis by Louizos Alexander Louizos, http://www.easytradeforex.com
TRENDLINE ANALYSIS
Great breakthroughs have surfaced with electronic trading and certain technical indicators
are widely used. Nevertheless an affluent trader should be very skilled with trendline
analysis in order to correctly predict Forex price movements. “Trend is my friend” is
commonly said among traders. In this chapter you will learn how to correctly apply
trendline analysis, one of the most important tools in your trading analysis.
Market moves following some patterns. Movement of the market is either up (upward
market), down (downward market) or sideways (flat or non trending market). Always
avoid flat markets because market is fighting to make a decision and trading signals
are cancelled because of the market sentiment. Watch bellow a real market example of
flat type of movements. Remember: the longer the flat market the greater the
outbreak will be because when market decides the next direction then a new trend
evolves and many traders follow this trend.
Figure 1. This figure shows a flat market
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Figure 2 See what happened after the flat market finished. A strong uptrend evolved.
Figure 3 This figure displays a downtrend market environment
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Always remember: the longer the time period the most accurate your analysis will
be. Always look the longer time charts and transfer your analysis to shorter time
period. This last tip is something that is only referred in this book and can only be
acquired through experience in trading. For example in a daily chart market may look
flat and non decisive and in 1 hour chart you may recognize a trading signal. In this
occasion you should be very skeptical. Or worst, daily charts shows downward trend and
1 hour chart shows a trading signal to get long. This way you may be caught up in the
wrong direction. Continue reading to learn exactly how to avoid these traps.
SUPPORT AND RESISTANCE LEVELS
Market prices move in zig zag fashion. Peaks represent the price where more people sell
than buy so market couldn’t overcome this price. These prices are called resistance
levels. The troughs on the other hand represent the price where buying pressure was
higher than selling. These troughs are called support levels. Connecting consecutive
peaks a trader has a resistance line and connecting resistance levels a trader has
support line.
The first you have to learn is to draw support or resistance lines correctly and how to
evaluate the significance of each line whether it is support or resistance.
When you realize that the market is upward trending you should draw a resistance line.
To draw a resistance line pick up two peaks and draw the line connecting these peaks.
See figure below. When a third contact point occurs then trendline is confirmed.
Generally currency markets maintain its direction of trend.
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Figure 4 A resistance line in an uptrend
Follow these rules to see whether your trendline is significant:
1) At least two peaks are connected. More connecting peaks confirm the trend line.
2) Most significant trend lines occur around the angle of 45 degrees. Trendline at
sharper angles are indicating that trend is strong. Lower level trendlines indicate
that trend is close to reversal.
3) Longer period trendlines should be given increased weight. Day charts trendlines
are more significant that 1 hour charts.
4) Minor trendline penetrations (as long as 1%) should and may be disregarded.
When connecting two peaks never mind about a peak penetrating a bit the
trendline.
5) When you draw a trendline in candlestick or bar charts and connect two peaks or
troughs and there is an intermediate shadow over the trendline this is not
considered a break as long as the closing price is below the trendline See figure
2.13
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The same apply for connecting two troughs although the trendline is named
support. Support lines are drown in downtrend markets
Figure 5 Support line is drown is a downtrend market
The most important thing about support and resistance lines is that when a
confirmed support or resistance is broken then broken trend line is retested and
support line becomes resistance and resistance becomes support. Notice below how
the support line when broken became resistance.
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Figure 6 A broken resistance line is broken then retested and became support
This way you already have the first prediction utility of market movement. Watch
carefully market when it reaches significant support of resistance levels.
Test a lot with trend line support and resistance and channel designing (see below for
channels). These are one of the most important tools you will ever use so it is very crucial
to know how to use them correctly.
FOREX CHANNEL LINES
One of the most important elements of trendline resistance is channels.
Channels are two parallel lines that restrict price action. In order to draw a channel you
should first draw a support or resistance line.
To draw a support or resistance line select an obvious trend and connect two hi or low
points of price action. Then draw a parallel to the first line that restricts price movements.
That is the channel line. When price fails to reach support or resistance and is closer
to channel line then we may see acceleration of the trend. When price fails to reach
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channel line then the ongoing trend may be weakening. Channel breakout means
that the prices retest the broken channel line. After successfully retesting of channel
lines we have a price target at least equal to the channel width.
Channel lines act as resistance and support. When broken they are usually retested. This
test gives us a trade entry point. If channel lines are at the same level as a Fibonacci
retracement level then price reversal is imminent because Fibonacci resistance gives extra
support to price action (you may take a look at our Fibonacci trading chapter in this book
now). Look at the figure 2.14. It is an 11-17-2006 EUR/USD chart
Figure 7 Channel lines in an uptrend with Fibonacci levels
Look how the broken channel line is retested and then price action reverses. Watch the
price target or the broken channel line equal to the width of the channel. Also notice how
the channel line with added Fibonacci 50% support line restricted price action. This trade
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setup may be used as a trading system. Feel free to use it and see profits come. This setup
is one of the favorites for professional fund managers.
TRENDLINE CHART FORMATIONS
There are chart formations indicating the reversal or continuation of a trend. These
patterns occur in any time frame although the higher the time frame the more significant
they are. We shall study at first trend reversal patterns. This means than when you
recognize these patterns in a chart there is a high probability that the current trend will
reverse.
HEAD AND SHOULDERS
Name of this formation is given after its shape. This formation looks like a head and
shoulders. It consists of three consecutive rallies all based in the same support line named
neckline. The two shoulders should be almost equal on height and head should be the
highest. You may enter the market during retest of broken neckline. The most significant
head and shoulders pattern is in weekly or monthly or daily charts. Head and shoulders
on lower time frame are unreliable. Price target is the length between top of head and
neckline.
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Figure 8 A head and shoulders pattern in a daily chart.
In real market environment head and shoulders almost never appears as clean as the
schematic. Trader must be careful not to misinterpret false head and a shoulder keeping
in mind that neckline is seldom a perfect horizontal line although the significant point of
the formation should be tangential to the neckline. The same applies to inverse head and
shoulders
Figure 9 Inverse head and shoulder pattern.
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Look at the above market examples carefully. Then check the schematic below. Practice
a lot. In order to recognize head and shoulders in market environment your eye should be
flexible enough.
Figure 10. Schematics of head and shoulders pattern
DOUBLE TOP AND DOUBLE BOTTOM
This formation consists of two consecutive peaks or troughs of approximately the same
height. The more equal the height the more significant the formation. Resistance line is
formed connecting the two tops.
Figure 11 Schematics of double bottom and double top
Consider these in order to validate the formation:
1) The higher the time frame the more valid the formation
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2) Contact points should be tangential to the resistance line. In real market

environment contact points cannot be perfectly tangential. Take this into account
when deciding whether a formation is a valid double bottom or not.
3) You should only trade upon confirmed break and retest of resistance line.
Breakout confirmation consists of a closing price outside the resistance line.
4) Target price is relevant to price and time symmetry and make take long to be
fulfilled.
Figure 12 Double bottom in real market environment
TRIPLE TOP AND TRIPLE BOTTOM
The same apply to triple top and triple bottom formation. This formation is a hybrid
of double top or bottom and head and shoulders.
TREND CONTINUATION PATTERNS
These patterns signal the continuation of the previous trend. Unlike trend reversal
patterns they consist of short consolidation periods.
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FLAG FORMATION
It looks like a flag. It consists of a steep upward or downward trend (flagpole) and a
brief consolidation period which tends to be sloped in the opposite direction of the
trend or it is simply flat. Consolidation is bordered by support and resistance lines
which are parallel or mildly converging to each other. These lines give the flag. When
price breaks out of consolidation price target is the length of the flagpole measured
from the point of breakout. The higher the time period of flag formation the more
valid the signal. Beware of false breakouts from the flag.
Figure 13 A bearish flag
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Figure 14 Another bearish flag
PENNANT FORMATION
Pennants are the same as flags with the difference that support and resistance lines of
consolidation period converge much more than flags.
Figure 22 A bearish pennant
Figure 15 A bullish pennant
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TRIANGLE FORMATION
Triangles are pennants with no poles. There are four types of triangles:
1) Symmetrical: it consists of two symmetrically converging resistance and support

lines with at least four significant points (eg. 2 on resistance and 2 on support).
This pattern visualized the ambivalence of Forex market balance between supply
and demand and breakout may occur on either side.
2) Ascending triangle: Flat resistance line and rising support line. The breakout
should occur on the upside with price objective the width of the base of triangle
measured above the breakout
3) Descending triangle: Flat support line descending resistance. Breakout should
occur on the downside.
4) Expanding triangle. Support and resistance lines converging towards the
beginning of the formation. Expanding triangles are rare in Forex Market.
In real market environment do not expect to find absolutely flat lines. Support and
resistance lines should be designed according to hi/low of the prices. Take good care in
designing these patterns.
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Figure 16 A descending triangle
Figure 17 An ascending triangle
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Figure 18 A symmetrical triangle
WEDGE FORMATIONS
It resembles the shape of triangles but it behaves like a pennant without a pole. It signals
only continuation of the trend with no price objective. It is heavily sloped and breakout
occurs to the opposite direction of the slope. There are two type of wedges: falling and
rising.
Figure 19 A falling wedge
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Figure 20 A rising wedge
RECTANGLE FORMATION
This formation reflects a consolidation period. Breakouts may occur on either side and
price objective is the height of the triangle.
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ALWAYS REMEMBER
1) Always try to design these patterns in longer term time charts and on line
charts. If you prefer to use candlesticks use the shadows as contact point for
your resistance and support lines.
2) False breakouts are common so do not be trigger-happy with your trades
until it becomes clearer. False breakouts tend to occur more often in the case
of continuation patterns. Valid breakout on the other side shows the
continuation pattern we thought we designed was a reversal pattern. Design
your patterns carefully.
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I hope you enjoyed this ebook. For more tutorials you could visit my site at
http://www.easytradeforex.com
Sincerely yours,
Louizos Alexander Louizos
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Trendline Analysis by Louizos Alexander Louizos, http://www.easytradeforex.

Figure 1. This figure shows a flat market

Figure 3 This figure displays a downtrend market environment

SUPPORT AND RESISTANCE LEVELS

Figure 4 A resistance line in an uptrend

Follow these rules to see whether your trendline is significant:

Figure 5 Support line is drown is a downtrend market

FOREX CHANNEL LINES

One of the most important elements of trendline resistance is channels.

Figure 7 Channel lines in an uptrend with Fibonacci levels

TRENDLINE CHART FORMATIONS

HEAD AND SHOULDERS

Figure 8 A head and shoulders pattern in a daily chart.

Figure 9 Inverse head and shoulder pattern.

Figure 10. Schematics of head and shoulders pattern

DOUBLE TOP AND DOUBLE BOTTOM

Figure 11 Schematics of double bottom and double top

Consider these in order to validate the formation:

2) Contact points should be tangential to the resistance line. In real market

Figure 12 Double bottom in real market environment

TRIPLE TOP AND TRIPLE BOTTOM

TREND CONTINUATION PATTERNS

Figure 13 A bearish flag

Figure 14 Another bearish flag

Figure 22 A bearish pennant

Figure 15 A bullish pennant

1) Symmetrical: it consists of two symmetrically converging resistance and support

Figure 16 A descending triangle

Figure 17 An ascending triangle

Figure 18 A symmetrical triangle

Figure 19 A falling wedge

Figure 20 A rising wedge

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