Page 44 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

Many times, markets break into an uptrend or downtrend out of a sideways trading pattern or
consolidation period. In the soybean chart, prices traded in a 50<f range for nine weeks before
breaking the resistance level and beginning a short move up. As a general rule, the longer the
consolidation period, the greater the rally after the breakout.

Because traders need time to be convinced that they should put their money into the market,
sideways patterns are more likely to occur near the bottom of a move. The beginning of a
downtrend often will be sharp and sudden as investors pull money out of the market.

FALSE BREAKOUTS
Another way beginners might be fooled is seeing false breakouts of tops and bottoms. As prices
begin to make their move in switching from a downtrend to an uptrend, traders with short
positions will "cover." This buying many times will cause the market to rally above the downtrend
line. This short covering rally seldom holds, and prices may drop back to the breakout point. The
uptrend is confirmed when prices close above the high of the short rally.

On a topping formation, long liquidation takes prices through the uptrend line on a short break.
Before the downtrend begins, the market sometimes rallies back to "test" the uptrend line as
shown on the soybean chart in September. As the downtrend unfolds, the second reaction rally
could not top the highs of the first rally.

Channel lines are an extension of the trend line theory. The October through January downtrend
on the soybean chart shows prices staying in a "channel" between the downtrend line and a line
drawn parallel to it, connecting the lows. A channel line in a down trending market helps identify
where support may be found.

Speed lines are another line which shows where prices may find support or resistance.
Frequently, speed lines and trend lines will overlap, emphasizing that line's importance to the
market.

The speed line on the soybean chart starts from the June 29 low. To find the points to connect
with the low, divide the range between the low ($6.40) and the high ($9.94) into thirds and
subtract from the high.

Plot the point obtained by subtracting one-third of the range from the high on the day the high
was made. A line drawn between this point ($8.76) and the low established the 1/3 speed line.
The 2/3 speed line is drawn through the point that is two-thirds of the range subtracted from the
high ($7.58) plotted on the day the high was made.

Another way to detect a change in trend is by looking for a price from which the market reacts
two or three times.

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