Step 2 deals with the analysis of any currency in the Forex market to predict its future value. Trend lines, channels, support and resistance and the Andrew’s Pitchfork method are used in this step for prediction. If proper prediction is done then success rate will be higher.
Trend Lines shows the trend of any currency in the Forex market. This line is drawn by connecting two or more closing price points. Trend lines only indicate the possible behavior of any currency and do not guarantee fix limit. Trend lines indicate the direction of the price movement based on the previous price points. Based on the direction of the price movement, trend lines are of three types. The three types of trend lines are Up-trend line, Down-trend line and Flat-trend line. Up-trend line shows the price moving in the upward direction, Down-trend line shows the price moving in the downward direction and Flat trend lines show the flat price movement. Trend lines can be drawn for the short term period, medium term period and the long term period.
Support and Resistance
Support and Resistance Forex points Support for a currency is that price point below which the price of currency has not gone for the past trading sessions in a time period and finds difficult to move below that point. Resistance for a currency is that price point above which the price of currency has not gone for the past trading session in a time period and finds difficult to move above that point. The time period can be short term, medium term or long term. The knowledge of support and resistance makes it easier for the traders to analyze when to trade and when not. The price below the support or above the resistance is not safe to trade.
Forex Price Channels are drawn in the charts and represent the range of any currency. This means that the price of currency has not moved outside the channels over a fixed period of time. Channels should be properly constructed and should avoid short breakouts because if the channels will not be properly constructed then you will notice most of the currency trading outside the range. If price goes outside the channel at some point then its channel breakout. Channel breakout may be of two types: Upwards channel breakout and Downwards channel breakout.
Upwards Channel breakout and Downwards Channel breakout
Upwards channel breakout occurs when the price of a currency crosses the uptrend line and downwards channel breakout occurs when price of currency crosses the downtrend line. Sometimes the price of a currency breaks upper or lower trend lines only once and then returns back in the channel. This type of breakout is not a true breakout as breakouts existed for very short time only and cannot benefit the traders or investors so this breakout is termed as false breakouts. One cannot benefit from false breakouts so if a trader or the investor wants to make money then he should open a position for any currency only after doing technical and fundamental analysis. One of the easiest and popular methods of technical analysis is Andrew’s Pitchfork.
Andrews Pitchfork is a technical analysis method invented by Dr Alan H. Andrews. This method is based on the concept of median line studies. It is represented in the chart with the help of three lines drawn through three points. These lines are median line, support line that is drawn below the median line and the resistance line that is drawn above the median line.