MetaTrader 4.0 Line Studies
In technical analysis, lines and various geometric figures plotted on price charts are called Line Studies which are used to by traders to set market expectations or determine potential profit or stop levels. MetaTrader 4.0 includes these line studies:
Support and Resistance Lines
Price movement of a currency pair is the result of a market activity between buyers and a sellers. Buyers push prices higher. Sellers push prices lower. The direction prices actually move shows who is dominating the market at the current time. The price at which a trade takes place is the price at which a buyers and sellers agree to do business. It represents a consensus of their expectations..
Support is a level at which buyers take control over the prices and prevent them from falling lower. Support levels indicate the price where the most of investors believe that prices will move higher.
Resistance, on the other hand, is the point at which sellers take control of prices and prevent them from rising higher. Resistance levels indicate the price at which the most of investors feel prices will move lower.
When price action breaks below Support or breaks above Resistance, market activity increases. Some times, prices will dramatically move beyond the broken level; and other times, prices will retrace to the broken level to confirm an actual break. As a rule of thumb, experienced traders know that "old support becomes new resistance" and "old resistance becomes new support."
A trend represents a consistent change in prices. Trends differ from Support and Resistance levels. Trends represent change; whereas, Support and Resistance levels represent barriers to change.
An Uptrend is defined by successively higher Lows. A rising trend can be thought of as a rising support level where buying pressure pushes prices higher.
A Downtrend is defined by successively lower Highs. A falling trend can be thought of as a falling resistance level where selling pressure pushes prices lower.
Similar when prices break support and resistance levels due to market expectations or sentiment change, prices can penetrate rising and falling trend lines. Usually, there is an increase in market activity when a trend line is penetrated. Market volatility is the key to determining the significance of the penetration of a trend.
Leonardo Fibonacci was an Italian mathematician born 1170 AD. He is considered to have invented numerical series during his studies of Great Pyramid of Giza. Fibonacci Numbers are a numeric sequence where each next number can be got by adding the last two ones: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. These numbers are interrelated with a series of correlations. Each number in the series is approximately 1.618 times more than the previous number, and each preceding one makes approximately 0.618 of the consequent one.
MetaTrader 4.0 includes Fibonacci Arcs, Fan, Extension, Retracement, and Time Zones.
W.D. Gann (1878-1955) developed a number of unique methods of price chart analysis. He paid the most attention to geometrical angles reflecting the interrelation between the time and the price. Gann believed that certain geometrical figures and angles have specific features to be used for forecasting price dynamics. Gann considered that there was an ideal ratio between time and price if the price grew or fell at an angle of forty-five degrees to the time axis. This angle is designated as "1х1" and corresponds with unit price increase for each unit time interval.
MetaTrader 4.0 includes the Gann Fan, Gann Line, and Gann Grid.
Linear Regression Channel
This line study based on linear regression consists of two parallel lines, equally above and below the linear regression trend line. This trend line is drawn between two points on a price chart using the method of least squares. As a result, the trend line becomes the median line of the changing price and is considered as an equilibrium price line. Any deflection up or down indicates the activity of buyers or sellers respectively. The distance between either the top or bottom of the channel and regression trend line is equals to the value of maximum close price deviation from the regression line.
All price changes take place within Linear Regression Channel, where the lower line of the channel works as a support line, and the upper line works as a resistance line. Prices usually exceed the channel frames for a short time. If they keep outside of the channel frames for a longer time than usually, it forecasts the possibility of a trend turn.
Equidistant Channel represents two parallel trend lines connecting extreme maximum and minimum close prices. Market price jumps, draws peaks and troughs forming the channel in the trend direction. Early identification of the channel can give a valuable information including that about changes in the trend direction what allows to estimate possible profits and losses. It is necessary to give the direction of the channel and its width to build the instrument.
This line study consists of three parallel trend lines and is based on standard rules of interpretation of support and resistance lines. The first trend line starts in a selected extreme left point (it is an extreme high or low) and is drawn exactly between two extreme right points. This line is the "handle" of pitchfork. Then, the second and the third trend line issuing from two above-mentioned extreme right points (important peak and trough) is drawn parallel to the first one. These lines are "tines" of the pitchfork.