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 useful as any other method.
Unfortunately, most forex traders don’t draw them correctly or try to make the line fit the market instead of the other way around.What Are Trend Lines?
A trend line is a straight line that connects two or more price points on a chart, acting as a visual guide to indicate the direction of a currency pair’s trend.
Traders use these lines to identify the general direction in which a currency pair is moving, whether it’s upwards (bullish trend), downwards (bearish trend), or sideways (ranging or consolidating market).
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).
This is known as an ascending trend line.
In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).
This is known as a descending trend line.
When a market is neither moving upwards nor downwards but is instead consolidating, a horizontal trend line can be drawn to represent a support or resistance level within a range.
Technically, there is no “horizontal trend line” in the classical sense of trend lines since they’re used to indicate upward or downward trends. They should be more accurately referred to as support and resistance levels.
Types of Trends
There are three types of trends:
- Uptrend (higher lows)
- Downtrend (lower highs)
- Sideways trend (ranging)
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.
What’s next?
Nothing.
Uhh, is that it?
Yep, it’s that simple.
Here are trend lines in action! Look at those waves!
While the concept of drawing trend lines is simple, its application requires some skill.
Here’s how you can effectively draw trend lines:
- Identify the Trend: Start by determining if the market is in an uptrend, downtrend, or sideways trend.
- Connect the Significant Points: For an uptrend, connect two or more lows. For a downtrend, connect two or more highs. Ensure that the line touches as many points as possible without cutting through the price action.
- Extend the Line: Once the line is established, extend it into the future to gauge where potential support or resistance levels may appear.
- Adjust for Accuracy: Sometimes, a trend line may need to be adjusted as more data becomes available. While the initial points should be respected, it’s okay to fine-tune your line as market conditions evolve.
Here are some important things to remember using trend lines in forex trading:
It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.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.
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!