Every trader looks for ways to predict the market. Trend lines make it possible to filter out the “noise” in the forex markets and gain insights into price movements.
Trendline trading can be effective over different timeframes, making it an excellent option to add to your forex arsenal.
Here is a closer look at how to trade trendlines and the nuances of this approach.
Trendline trading can be effective over different timeframes, making it an excellent option to add to your forex arsenal.
Here is a closer look at how to trade trendlines and the nuances of this approach.
What is a trend line?
A trend line is a line that connects either the highs (down trend line) or the lows (up trend line) of the bars on a price chart to indicate the general direction of the trend.
If the line is drawn off the highs and slopes downwards, it’s considered a downtrend line, which indicates a bearish trend. If the line is drawn off the lows and slopes upwards, it’s considered a bullish trend line and indicates an uptrend.
If the line is drawn off the highs and slopes downwards, it’s considered a downtrend line, which indicates a bearish trend. If the line is drawn off the lows and slopes upwards, it’s considered a bullish trend line and indicates an uptrend.
Why use trend lines in trading?
Helpful in visualising the overall trend of the market
Useful for finding levels of support and resistance within a market
Allow you to see a trend more clearly
Ability to draw multiple trend lines to check market volatility
Trading platforms like MetaTrader 4 allow you to draw trend lines manually or connect the tops of your Candlestick or bar charts automatically.
How to find and draw trend lines
For better long-term results with your forex trading, here is a simple way to find and draw trend lines:
1. Open a clean chart without any analysis or indicators on it
2. Find the highest price point on the chart
3. Click the line drawing icon on this point and drag it to the end of the chart
4. Move it down slowly until the line touches two (or more) highs
Below is an example of trend lines drawn on a Candlestick chart.
1. Open a clean chart without any analysis or indicators on it
2. Find the highest price point on the chart
3. Click the line drawing icon on this point and drag it to the end of the chart
4. Move it down slowly until the line touches two (or more) highs
Below is an example of trend lines drawn on a Candlestick chart.
What is most important is that the line touches at least three points (including the origin). The more points the line touches, the stronger it is. However, three points is a minimum.
How to trade trendlines
Trend lines have several different uses. Read on for how you can utilise these tools to assist with your trading strategies.
Range Trading
If you have a well-established trend with lines at the top and bottom that are roughly parallel, you can take advantage of the likelihood that it will continue. As the bottom trend line approaches, you can look for signals in your chart or indicator that the market will reverse and move toward the upper trend line.
You can open a long position when the indicators give you bullish signals. You will expect the market to move upward toward the top trend line. As it approaches this upper level, you can look for an exit point and take the profits.
If you trade CFDs, you can also profit when the market reaches the upper trend line. This can be achieved by opening a short position when the market gives you bearish signals. You expect that the price will move downward toward the lower trend line. Once it gets close to this level, you can close your position.
You can open a long position when the indicators give you bullish signals. You will expect the market to move upward toward the top trend line. As it approaches this upper level, you can look for an exit point and take the profits.
If you trade CFDs, you can also profit when the market reaches the upper trend line. This can be achieved by opening a short position when the market gives you bearish signals. You expect that the price will move downward toward the lower trend line. Once it gets close to this level, you can close your position.
Breakout trading
Many traders want to learn how to trade trendline breakout situations, as breakouts can sometimes lead to significant profits.
If the market has been honouring the trend by reversing it when it gets close to the top or bottom line, most traders will expect it to continue. It takes a significant event for the market to break out of its established range.
Breakouts occur when the market closes above the upper trend line or below the lower trend. A spike in trading volume usually accompanies the breaking of this barrier. If you are determining what event is causing the breakout, you confirm it by viewing the trading volume for the period when the breakout occurs.
Almost all traders consider the move a breakout if the bar or candle for the period closes above the trend line.
If you trade CFDs, you can open a long position when you see an upper-level breakout or a short position if the market breaks out below a bottom-trend line.
If the market has been honouring the trend by reversing it when it gets close to the top or bottom line, most traders will expect it to continue. It takes a significant event for the market to break out of its established range.
Breakouts occur when the market closes above the upper trend line or below the lower trend. A spike in trading volume usually accompanies the breaking of this barrier. If you are determining what event is causing the breakout, you confirm it by viewing the trading volume for the period when the breakout occurs.
Almost all traders consider the move a breakout if the bar or candle for the period closes above the trend line.
If you trade CFDs, you can open a long position when you see an upper-level breakout or a short position if the market breaks out below a bottom-trend line.
A word of caution to traders
Markets do not move linearly. Instead, they are jagged and tend to move two steps forward and one step backwards.
Put simply, just because a trader has found a trendline, it doesn’t mean the market is moving in that direction overall. The overall trend may be the opposite, and the move discovered might be a counter-trend, a consolidatory move within the main trend.
Put simply, just because a trader has found a trendline, it doesn’t mean the market is moving in that direction overall. The overall trend may be the opposite, and the move discovered might be a counter-trend, a consolidatory move within the main trend.
Markets and assets trend lines blend well with
Trend lines can work with almost any type of asset. Here are some markets where you can use trendline trading:
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Frequently Asked Questions
Trend lines require at least three points. However, if you have two points, look at indicators and price actions to signal that a third point will form along the current trend.
Candlestick patterns and indicators like the RSI, Stochastic Oscillator, and MACD can also help you master trend line strategies. They help confirm whether the market will move down or up and give you an early warning about a possible breakout.
Candlestick patterns and indicators like the RSI, Stochastic Oscillator, and MACD can also help you master trend line strategies. They help confirm whether the market will move down or up and give you an early warning about a possible breakout.
You must consider other factors involved in the trend line breakout. If the breakout is likely to continue, you will see a high trading volume during the period when the breakout occurred. Also, you may notice that the indicators are not signalling that a reversal is about to happen.
After a breakout occurs, the market may fall back to the trend line level it has just broken through. If the breakout is legitimate, it will not cross back over the trend line.
After a breakout occurs, the market may fall back to the trend line level it has just broken through. If the breakout is legitimate, it will not cross back over the trend line.
Trend lines can sometimes cross one another. For example, an upper trend line made from the tops of price waves and a lower trend made from the bottoms of the same waves could potentially come together, creating an arrow-like shape. This is typically a sign that the market will break one way or the other.