When searching for Forex information on the internet you are likely to find articles relating to trendlines and trendline analysis.
Tom DeMark is a specialist in the field of technical market analysis and his best-selling book "The New Science of Technical Analysis" released in 1994 spells out some innovative techniques when it comes to the use of trendlines.
Much Forex information on the internet is of a general nature, and many articles are written about Forex by individuals who are not traders themselves. Tom DeMark on the other hand has had a long career with institutions trading stocks, futures, currencies and options.
His guidelines on the use of trendlines are very specific and they can be helpful to the newer trader who is searching for reliable Forex information on how to use standard indicators.
Here is a brief step-by-step description of how to draw DeMark trendlines:
Note: The term swing high and swing low (also called cycle high and cycle low) refers to the following:
In An Uptrend: A swing high is the wick of a candle that is higher than the wick of the candle to the left and right.
In A Downtrend: A swing low is the wick of a candle that is lower than the wick of the candle to the left and right.
Obviously the more candles to the left and right that are higher in a swing low or lower in a swing high makes the swing or cycle more significant.
An uptrend is where price is making higher highs and higher lows. A downtrend is where price is making lower highs and lower lows.
Drawing DeMark Trendlines
Drawing Trendlines In An Uptrend
1. Examine the bottoms of the candles on your chart and identify the most recent candle wick that is lower than the candle wicks to the immediate right and left of it.
2. Look left on the chart, and identify the previous low candle that has candle wicks higher to the immediate right and left of it which is lower than the current low candle.
3. Now draw a line from the current lowest candle to the previous lowest candle (drawing from right to left).
4. Now take the end of the newly drawn line which stops at the current low candle and extend it forward some distance (drawing from the present position to the right).
Drawing Trendlines In A Downtrend
1. Examine the tops of the candles on your chart and identify the most recent candle wick that is higher than the candle wicks to the immediate right and left of it.
2. Look left on the chart, and identify the previous high candle that has candle wicks lower to the immediate right and left of it which is higher than the current high candle.
3. Now draw a line from the current highest candle to the previous highest candle (drawing from right to left).
4. Now take the end of the newly drawn line which stops at the current high candle and extend it forward some distance (drawing from the present position to the right).
You have now drawn a Tom DeMark trendline.
This can now be a reference point for future price action. It will often be observed that price will come and check this level. If it breaks through, it can mean a change in direction, the significance of which will depend on the time frame being used.
Trendlines drawn on 5 minute or 15 minute charts have much lesser significance than trendlines drawn on higher time frames such as the 1 hour, 4 hour, or daily.
Much Forex information extols the virtues of trendlines as an indicator of possible future price action.
Mr. DeMark certainly has made this a science and his detailed approach to drawing trendlines is certainly more accurate than just drawing general trendlines along the bottoms and tops of trends according to the way the eye sees.
However, trendlines in themselves do not indicate where high probability trades can be taken.
It is important to use a variety of indicators before pulling the trigger. Examining previous levels of support and resistance is probably far more significant in determining where price is likely to hesitate that watching trendlines.
However, they can be useful. If you find a key support or resistance level also coincides with a Fibonacci retracement or extension level which is also at an intersection with a trendline, then you have built a reasonably solid case for a trade.
Use this Forex information on DeMark trendlines wisely, with caution, and it can be another useful addition to the Forex day trader's toolkit!
by Michael A. Jones