Trend lines are one of the most common and used techniques in technical analysis in forex trading.
We must first answer the question: what are the trend lines, and how can we use them in forex trading?
Trend lines can be used both to determine the trend and to identify important trading areas.
If we draw them correctly, on the tops and bottoms, we can understand whether a certain tool has an upward trend or a downward trend.
In addition to determining the trend, we can use them to determine resistances and supports, but they are not as reliable as like for determining the trend.
No matter what strategy you use, trend lines should be present in your trading arsenal. They are very important, of course, when the trader draws them correctly.
When they are drawn properly (on the tops and bottoms) on the candles themselves, and not through them, they can be very useful. Here we want to open a big bracket (many of the traders do not draw them correctly, they fit them on the market, not with their rules which we will look at later in the article.).
Here we want to open a big bracket (many of the traders do not draw them correctly, and not following the rules, which we will look at later in the article). We need to remember one thing, we are adapting to the market, and the market is always right.
Determining the trend with trend lines.
In the image, we can see a green and a red trend line.
The green trend line is drawn exactly from the bottom of the chart, so we can determine the trend of the particular instrument. We are having an uptrend.
If the candles start to break the upward trend line, there is potential for reversing of the trend.
The red trend line is drawn at the top of the chart, so we can determine the downward trend of the instrument.
Upward trend line
Let’s look first at the green trend line (uptrend).
This is a very well drawn trend line from the bottom of the chart. To build a trend line we need to have 2 points. On the graph we can see these 2 points, these are point 1, point 2.
The remaining points (ricochets from the trend line) 3,4,5,6, maybe our signals to open a trade.
When the price reaches the green trend line and bounces off it, it means we can open a buy position.
And the more the trend line has not been broken, but tested, the stronger it is.
In the blue square, you can see how we marked the price breakout, after that the price returned to test the trend line.
At such a moment we can see a breakout of this support zone. And now we can start looking for reversing of the trend.
Downward trend line
After looking at how to determine the uptrend (green trend line), now is the time for the downtrend.
The downtrend is determined by drawing a trend line along the peaks. This is the so-called resistance.
In order to draw the right trend line, it should be on the tops and on the candles themselves.
We need to have 2 points (point 1 and point 2), and every next rebound from the red trend line can be a sell position.
On the 3rd point, we have a very good sell signal because the price is bouncing of the red trend line.
With the red rectangle, we marked the breakout of the trend line.
But as we have mentioned more than once in our articles and our trend videos, after a breakout it is good to wait for a retest of the trend line, as it happened in the green rectangle.
First, we have a break, then we wait for a ricochet from the trend line, then we can expect a reversal of the trend.
And the experienced traders can open a buy position of the ricochets after the breakout.
Trend lines are deliberately colored, green (up) for an uptrend, and red (down) for a downtrend.
How to draw a range, and what is a range?
To simplify it, a forex range is when the price moves in a corridor.
It is assumed that then the price is in consolidation and it is best to get out of this corridor so that we can catch the trend again.
We can draw the range by putting a straight line on the tops and one on the bottoms.
One must be parallel to the other.
But for the range in forex trading, we will make a separate article.
Important: Here are some important things about trend lines.
The more times a trend line is tested, the more reliable it is.
We need to have two tops or two bottoms to be able to draw a valid trend line.
The more inclined a trend line is, the more volatile the market will be, there is potential for more tests on this trend line.