Trend lines forex is one of the trading tools that usually becomes a tool in technical analysis by traders.
Trend lines forex tool useful to determine the direction of the trend and where the possibility of prices will change direction.
How to draw trend lines correctly, the trader will link at least two extreme highs or lows.
Although this is a simple tool, if you draw the trend line correctly, it will be a good tool to be an entry point reference.
In the previous chapter we learned about forex support and resistance, you can read it again if you need it as a reminder while learning to trade.
Work from home CFD, crypto, forex trading online with TenkoFX
TenkoFX broker regulated by IFSC Belize
How to draw a trendline in forex trading
Read also Technical Analysis. Upgrade skill.
Basically the trend lines forex has the function of being support at the uptrend and being resistant to the downtrend.
Drawing trend lines forex is an interesting analytical art because even though this is a simple method, drawing a correct trend line will give you good accuracy like the other methods.
Before we learn more about how to draw trend lines, we will first understand the types of trends in the forex market.
Trends in the forex market are classified into three.
Simple. An upward trend is a state when prices are moving with a tendency to upward. Although there is a downward wave, often the next low price is higher than the previous low.
Take a look at the image below.
T = Trough, P = Peak, HT = Higher Trough.,HP = Higher Peak
The prerequisites for an uptrend are a series of higher peaks and higher troughs. Because there is a series of words, there should be more than one.
This means that there must be at least two peaks and two valleys that are getting higher and higher. You can see to valid uptrend if the first trough always lower to next through.
How exactly is this downtrend? The downtrend is a state when prices are moving with a tendency to go down.
In a downward trend, the price of the previous peak is often lower than the price of the next peak, and the price of the valley is often lower than the price of the previous valley.
T = Trough, P = Peak, HT = Higher Trough.,HP = Higher Peak.
The prerequisite for a downtrend is that a series of peaks lower and troughs also lower. Because there is the word “series”, there must be more than one.
This means that there must be at least two peaks and two valleys that are getting lower.
What is the sideways condition? Sideway is a condition where the market moves not uptrend and does not downtrend and tends to move within a certain range.
What does it mean? just flat.
There are still up and down but only limited to a certain range. In other words, we cannot find the preconditions for uptrend or downtrend.
T = Trough, P = Peak,LP =Lower Peak,HT = Higher Trough, LT = Lower Trough.
From the image above, we find the price of the peak is not lower or higher than the previous peak, as well as the valley, not lower or higher than the previous valley.
Prices tend to move within the limits of the highest and lowest range, this condition is called a sideway.
We already know how to recognize the types of trends, it’s time we will learn how to draw a trend line to become more familiar with this simple analysis.
How to draw a trend line on a graph, of course, you must first recognize the trend. In market uptrend conditions, how to draw a trendline by connecting at least two trough points.
Whereas in a downtrend market, how to draw a trendline by connecting at least two peaks.
Draw trend lines in a downtrend market
To draw a trend lines forex in a downtrend market condition, you must first understand the concept of a downtrend as described in the previous explanation.
Find the peak price as a starting point to draw the trend line, then connect with the next peak price which is lower than the first peak.
This is easy, below is an illustration
Of course, you already understand the basic forex support and resistance, if not you can read it again.
In a downtrend market, this trend line will function as resistance, so you can wait for prices to go to the trend line to open short with a stop loss above the trend line.
Draw trend lines in uptrend market condition
The way to draw a trend line for an uptrend is the opposite of how to draw a trend line in a downtrend.
Find the starting point to draw a trend line at the valley price, then connect with the next valley point.
You can do more practice to find the best way to determine the valley.
The image below is an illustration to draw a trend line in an uptrend market.
In the uptrend market, the trend line functions as support, where support is a crucial area that often reverses the direction of the trend.
You can use the trend line as a reference to open long positions with a stop loss below the trend line.
Draw trend line in sideways market condition
To determine how to draw a trend line in the sideways market, you need to know that prices move within a range marked by flat peaks and valleys.
How to draw a trend line in a sideway condition you can draw a starting point on the peak and connect with the next peak.
And you also need to draw a trend line from the starting point on the valley and connect with the next valley.
The image below is an illustration to draw a trend line in a sideways market
The two trend lines in the sideways market function as support and resistance.
You can make both trend lines to open short positions for the top trend line and short for the bottom trend line by placing a stop loss above or below the trend line. depending on where you open the position.
The explanation above is a basic way to draw a trend line, to apply in a direct chart you can do with an experiment and also try how to trade with this trend line using a demo account.
For example in the picture below, it might make you better understand how to draw trend lines with charts.
From the example image above, we can draw the conclusion that in price movements there can be several changes in trend.
Try to notice that in general, the picture above shows an upward trend that dominates the market or as a major trend.
Steps to draw a trendline correctly
Read also Three Drive Harmonic Pattern
Actually, to draw a trendline there is only one rule, it uses two extreme points, a peak or valley that can be connected.
Bearish trendline requires two high as valley points. Whereas the bullish trendline requires two low as trough points.
As long as the trader follows the rules, the trendline drawn is correct.
How to know the trendline drawn is a strong trendline? Maybe this question will appear next.
Drawing a trendline is easy, but how do you know one trendline is better than another?
With that question, we will explore three factors that determine the level of validity of the trendline:
- First, in the world of technical analysis, the higher the time-frame chart used, the stronger the trendline line drawn. The trendline drawn with the monthly chart is stronger than the trendline on the weekly chart.
- The second factor is the slope of the trendline. The sharper the slope, the faster the trend will change. Try to imagine running on a treadmill machine. When the engine is set at 8.0, it will definitely make you tired faster than at 4.0. If you rarely exercise on a treadmill, surely soon will soon reduce the speed from 8.0 to 4.0.
- The third factor, the more people who see the same thing, the more likely it is to happen. When the trend line retests several times, this means that the trend line is strong and valid.
- Fourth, A valid trendline connects at least two peaks or valleys, but to confirm the trendline itself we need a third peak or valley.
- Fifth, the trendline will be more valid if more points are connected by it.
- Sixth, never force to draw a trend line to fit the market.
If it’s really not possible for you to draw a valid trendline, look for other alternatives.
In essence, do not be forced to draw a trendline, because more important is to identify the trend itself.
Use trendline for trading
Use trendline allows us to uses stand alone without the help of other indicators. Because the essence of the trendline is to make transactions in accordance with the direction of the current trend.
By using a large timeframe, the trendline drawn is getting stronger, the trader can simply enter the position when the price touches the trendline.
But in the end, the trader is still in doubt, can use candlestick patterns before opening a position like in the following chart.
You need to study the candle pattern to determine the position with more confidence.
From the image above there are three candle patterns to confirm buy positions, bullish harami and bullish engulfing.
Looking retest and bounce trendline
Another way to use trend lines in trading is to use a trendline that assumes a breakout of the trendline which is then followed by a retest and a bounce.
Traders will wait at the retest point to place a short position, in the opposite direction of the rising trendline.
Because this way of trading takes the turn of the end, generally it can generate large profits because traders find the starting point of a new trend.
But the weakness of this method is that prices often return to follow the trendline direction and continue the early trend.
Although it is very simple in technical analysis, trend lines are a powerful tool to help traders make profits in trading.
By using a large timeframe this indeed requires patience because, on a large timeframe, not every day will get an entry signal.
However, by following this rule, the possibility of risk will also be lower, because rarely open new positions.
But you can also try using a trend line on a small timeframe, but with the target adjusting to the conditions of the trend, and this requires trial and error.
But besides that, taking into account fundamental news will also be better for your trading.
Because technical analysis with this trend line can also become invalid when fundamental news gives more influence to the market.
Are you ready to start trading?