trend lines trading

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Trend Lines

Trend lines are probably the most common form of technical analysis in forex trading.

They are probably one of the most underutilized ones as well.

If drawn correctly, they can be as accurate as any other method.

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).

In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

How do you draw trend lines?

To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

Yep, it’s that simple.

Here are trend lines in action! Look at those waves!

There are three types of trends:

  1. Uptrend (higher lows)
  2. Downtrend (lower highs)
  3. Sideways trends (ranging)

Here are some important things to remember using trend lines in forex trading:

The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.

Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.

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And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn’t a valid one!

Trend Lines

Trend lines are one of the most basic concepts of day trading (and long term investing), and they are also one of the most powerful concepts. Trend lines have been used for trading for as long as there have been markets, and they are well suited to any type of market (stocks, currencies, commodity futures, etc.). Trend lines are based upon the idea that markets move in trends (sustained movement in one direction, and then sustained movement in the opposite direction). Trend lines show the general direction of the price movement (upwards, downwards, or sideways), the strength of the current price movement, and where future support and resistance are likely to be located. In addition to being drawn on price charts (usually bar or candlestick charts), trend lines can be drawn on indicator charts (such as the CCI, TRIX, RSI, etc.), where they show the same information, but are based upon the indicator’s values instead of the prices.

What are Trend Lines?

Trend lines show three distinct but related pieces of information about their market. They show the direction of the current price movement, the strength (or more precisely the speed) of the current price movement, and the future support and resistance of the current price movement. These pieces of information can be used independently of each other, or they can be used together as part of a larger trading system. Each of these valuable pieces of information are described in detail in the following articles :

  • Direction of Price Movement
  • Strength of Price Movement
  • Support and Resistance

Drawing Trend Lines

Trend lines are straight lines that are drawn on graphical price or indicator charts. Upward trend lines are drawn on an upward diagonal from left to right (/), downward trend lines are drawn on a downward diagonal from left to right (\), and sideways trend lines are drawn horizontally from left to right (-). The following tutorials explain how to draw each type of trend line :

  • Drawing Upward Trend Lines
  • Drawing Downward Trend Lines
  • Drawing Sideways Trend Lines

Trading with Trend Lines

There are many different ways of trading using trend lines, but two of the oldest ways are trend line bounces and trend line breaks. Trend line bounces are trend continuation trades, because they expect the price to touch the trend line and then reverse back to its original direction. Conversely, trend line breaks are trend reversal trades, because they expect the price to go through the trend line and then continue in its new direction. Even though they are opposite trades, both trend line bounces and trend line breaks are based upon trend lines being support and resistance, so many day traders trade both of these trades. The following tutorials describe trend line bounces and trend line breaks in detail :

How to Use Trendlines in Your Trading

A key part of delving into technical analysis and trading off of charts, trendlines make an excellent tool for traders—if they’re used correctly. Used improperly though, they become ineffective and even counterproductive.

This might result in the false belief that prices have made a reversal or that a trend has strength when price action suggests it doesn’t. The following tips can help you effectively use trendlines as part of your trading strategy.

The Basics of the Tool

Trendlines highlight a trend or range (sideways movement). A trendline connects a swing low to a swing high, from the lowest point of the downward movement to the highest point in the upward movement. When the price rises, the trend line rises accordingly.

Connecting these lows with a line results in an ascending trendline, showing you that the prices are trending upwards. A trendline can also be drawn along the individual swing highs. This shows the angle of ascent, the strength of the price move, and the relative strength of the trend.

When the price falls, the swing highs fall. Connecting these highs with a line results in a descending trendline, illustrating the downward trend. A trendline can also be drawn along the swing lows. This shows the angle of descent​ and the strength of the downward price movement.

Multiple Trendlines

Typically, you would have more than just one trendline in play. At any given moment you could draw many trendlines, all showing the price movement over various periods of time.

Trendlines at very steep angles typically have a short life, since prices cannot sustain a near-vertical rise or fall for long.

That said, drawing trendlines whenever possible can aid new traders in spotting the overall trend, while also highlighting small trends and corrections within that overall trend.

During an uptrend, buying or going long opportunities may occur when a short-term downtrend meets the overall ascending trendline. During a downtrend, selling or shorting opportunities may occur when a short-term uptrend meets the overall descending trendline.

Adjusting Trendlines

Once drawn, trendlines often need to be adjusted. Prices don’t usually move in a uniform fashion, and since trendlines account for both time and price, they move along the price and time axis.

This means that any acceleration or deceleration of the trend requires adjustments to the trendline. Trendlines work as a tool, and can’t be relied on solely. To decide whether a trendline should be adjusted, or whether it has been definitely broken, consider how the price moves within a trend.

During an uptrend, the price makes higher highs and higher lows. As long as that keeps occurring, if the price moves below the trendline it doesn’t necessarily mean the trend has ended, the line may just need to be adjusted.

During a downtrend, the price makes lower lows and lower highs. As long as that happens, if the price moves above the descending trendline it doesn’t necessarily mean the trend has ended, the trendline might simply need to be adjusted.

Trendlines as a Guide

The need for constant adjusting makes a trendline imprecise for use as a trade signal. Also, consider that a trendline drawn at a slightly different angle can make a big difference in what price that trendline intersects with.

Therefore, while you can use trendlines as a guide, use more precise criteria for entering a trade, such as a move back in the trending direction, an engulfing pattern (where the next bar is larger than the previous one, engulfing it), or an indicator that adjusts more precisely and quickly to changes in volatility.

If you use trendlines as just a guide, then you don’t need to worry about drawing trendlines along the exact highs or lows. Draw „trendlines of best fit.“ The best fit trendlines still provide you with a visual trend and alert you to potential trade areas.

In some cases drawing trendlines along extreme highs and lows works, but when it doesn’t, draw trendlines of best fit. Since the trendline isn’t being used as a trade signal, it still provides you with relevant information about the trend, without the need to constantly readjust it.

Final Word on Trendlines

Trendlines are a great tool, showcasing short-term trends within the overall trend. Pay attention to price action and always consider it when using trendlines. If the price makes lower lows and lower highs, it’s still a downtrend even if the price moves above a descending trendline.

If the price makes higher highs and higher lows, the price still has an uptrend even if it moves below the trendline.

A trendline needs to be adjusted often, especially when day trading. Use „trendlines of best fit“ to avoid constantly adjusting. The trendline of best fit still shows the trend and when the trend may be reversing.

Use trendlines to alert you of potential trade opportunities, and use price action signals (taking action on trades simply by the price) to get in.

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