Page 46 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

HOW DO I KNOW?
In identifying the trend in a market, it is wise to start with the longer term charts to identify the
long-term trend. The daily charts offer trends for the shorter-run.

Technical analysis is more an art than a science. The answer to your question, "How do I know
where to draw the trend lines?" is, "They're your charts, draw them wherever they seem to
work best for you."
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TECHNICAL PRICE OBJECTIVES

Traders who believe in price charts make them work.

Chartists try to find repetitive price patterns which have a high degree of accuracy and usually
are self-fulfilling. Gaps and specific formations frequently meet these criteria. Gaps are one of
the most easily recognizable technical indicators. A gap is simply an empty spot formed on a chart
when price lines don't overlap the previous day's price action. Sometimes market psychology
changes overnight or over a weekend. That change in psychology forces prices to open and stay
above or below the previous day's range.

TIME TESTED RULE

Gaps are filled is another time-tested rule of the market. That is why gaps become future price
objectives. Quite often, prices retreat to fill a gap in a bull market before continuing the move.
Likewise, prices often rally in a bear market to fill gaps.

Gaps may serve one of three purposes. They are used to spot the beginning of a move, to
measure a move and to signal the end. There are four different kinds of gaps: common or
temporary, breakaway, measuring or runaway, and exhaustion.

The most frequently occurring gap is the common gap. When this gap occurs because of a slight
change in psychology, traders expect it to be filled soon. Once a gap is filled, it no longer has
significance. The early portion of the soybean chart on this page shows common gaps during the
December and January period which were later filled.

The breakaway gap on this chart occurred on May 7 and begins a major bull move. Breakaway
gaps often occur after a stretch of sideways trading and in the leading days of an uptrend or
downtrend. This type of gap remains unfilled for a long time.

It sometimes is difficult to tell right away that it's a breakaway gap and not a common gap.
When the market fails to fill this gap after a couple of weeks, this confirms the breakaway gap.

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