top of page

FOREX TRENDS LINES

What are Trend lines? A trend is when prices move in a zig zag but still follow a path or a trend in one direction. Trend lines connect significant low in an uptrend and they connect highs in a downtrend, creating dynamic resistance.

Trendiness are easily recognizable lines that traders draw on charts to connect a series of prices together. Trend lines are used to give traders a good idea of the direction an investments value might move.

Probably no exercise in technical analysis is more individualistic than identifying and drawing trend lines. Very often it comes down to a matter of beauty being in the eye of the beholder. But in the case of chart analysis, beauty is order, and the trend lines you draw are the outlines of that order. Ultimately drawing trend lines isn't complicated with a bit of practice, you'll get the hang of it pretty quickly.

What is a trend line? Basically a trend line is a line that connects significant price points over a defined time period on a price chart. The significant price points are usually the highs and lows of bars or candles through in the case off candles you can also use the close levels of the candle's real body.

Connecting the dots. The start point in drawing trend lines is looking at the overall forex price chart in front of you. What do you see? If it's your first time looking at a price chart, it probably looks like a jumble of meaningless bars and candles. The key is to turn that jumble into a meaningful visualization. of what's happening to prices. 

Scan the chart from left to right starting in the past and looking into the present. What are prices doing? Are they moving up or down or a little bit of both? If you are looking at a currency chart you can't they are doing a little bit of both. Draw your first trend lines to connect the highest highs (you need only two points from a line) and the lowest lows, to capture the overall range in the observed period. Always use the extreme points of the price bars or candles when connecting price points (lows with lows, highs with highs).

Look at what's happening between those forex two trend lines. You'll invariably see a number of smaller, distinct price movements making top the whole. You can draw trend lines to connect the highs price moves down and the lows of price moves up. Be sure to extend your trend lines all the way to the right edge of the chart, regardless of the other bars or candles that later break it. look for evens, wether it's horizontal, sloping down, shooting steeply higher, or anything in between. Eventually that evens will be brokenly price moves that break through the forex trend lines.

1_edited.jpg
2 1.jpg

In the above example, you see that we successfully drew two descending trend-lines connecting the immediate and distinctive lower swing high points without skipping any of the price action or cutting through candlesticks. Again, ensure you take your time in order to maximise trend-line accuracy! Always extend the trend-line out into the future as displayed.

Below is a screenshot of a trend-line drawn in an incorrect manner. The Trend-line connected from the first point towards the top left has been dragged all the way through the next lower swing high. The next 'point 1' has missed the next lower swing high completely.

2.jpg

The below chart (above) displays another clear example of how not to draw a trend-line. What's happened here is that the candlestick at point 2 has closed as an indecisive Doji however, this does not grant acceptance for trend-line application.

Even though that one candlestick is in fact signalling a potential reversal to the upside, the upside confirmation leg has not yet been formed. Simply compare this to the lower chart.

4 1.jpg
5.jpg

When should trend-lines be drawn on and which timeframe?

Many tend to struggle with trend-line application as they simply do not have any organisation and order to performing their technical analysis. Once Phase 2 has been completed and you are satisfied with the key level placement, you have them all labelled and the overall trend direction (If any) has been identified, move through into phase 3. Take notes on the state of the moving averages on the suggested timeframes, circle any lower highs, higher lows etc.

Trend-line application should start on the weekly timeframe, we don't want to focus too much on a monthly timeframe as 90% of the time, any monthly timeframe trend-lines are often more suited to the weekly timeframe anyway.

6.jpg

The first search for trend-lines should begin on the weekly timeframe. Once phase 2 + 3 have been completed, a

deeper insight into the trend direction should be established which will assist with the directional bias in which to draw the

trend-lines. Once satisfied with the weekly chart (stick to one or two lines) then scale down to the daily timeframe for further application. Keep the lines as neat as possible, extending them into the future as trend-lines also act as a sentiment guide. In this case on the AUD/USD the sentiment was extremely bearish, however the daily (blue) trend-lines have been broken to the upside after the support level holding. Current price is floating above the weekly (black) trend-line and if the pair decides to continue to the upside then we may have a bullish reversal on our hands!

7.jpg

Trend-line bounce rules and confluences to look for:

The trend is always a traders friend only if they adhere to the directional bias. This steadfast rule also applies to trading trend-lines, basically meaning you should only look to buy at bullish support areas above the trend-line or sell at bearish resistance areas below the trend-lineTrading only in the direction of the trend well let you exploit potential trend-line bounces as efficiently as possible. And while they won't always give you 100% winning trades, the trades that are winners should deliver more pips than had if you would when attempting to place trades against the trend.

Here is a clear example displaying the point in which we should wait for when trading a trend-line bounce. This 3rd point/ strike rule is for the Weekly + Daily trend-line bounces only, not couter trend-lines which we will get to shortly. Confluences are listed on the next page.

8.jpg
10.jpg
05.jpg

Each time you see the price bounce off the same line, the more likely it is that others are watching it too and are playing the same game you are. This could help you get several good entries in a row, but remember trend-lines won't last forever. So you want to make sure you set proper stop losses to get you out quickly if the support/ resistance trend-line eventually fails.

An upward slanting (Bullish/ Ascending) trend-line indicates price has been trending up, so you want to look for buying opportunities. Buying opportunities occur when the price drops down and comes close to the 3rd trend-line bounce as displayed below.

06.jpg

A downward slanting (Bearish/ Descending) trend-line indicates price has been trending down, so you want to look for selling opportunities. Selling opportunities occur when the price moves up and comes close to the 3rd trend-line bounce as displayed below.

07.jpg

Trend-line break rules and confluences to look for:

Trend-lines can indeed break! There are specific rues to adhere to once a Weekly/Daily trend-line is broken, these rules assist with structure and anticipating future price points in order to ride a reversal to maximum efficiency or simply use it as a bias.

1010.jpg

Inner, Outer & Long term Trend-line application:

Multiple trend-lines can be drawn onto a chart. It is suggested up to 3 in total! When performing this, ensure you are not going too far back, zooming. out too much as its important to stay relevant to short/medium term prices. The example below displays the inner, outer and long-term trend-lines with their respective connection points. These indicate the USD/CAD is firmly bullish with a most recent 3rd bounce evident, the price is expected to reach new highs.

1111.jpg

Inner, Outer & Long term Trend-lines. The break:

Once the inner trend-line has been broken and you are on the short side of that specific currency pair you must take profit near to the outer trend-line. In effect, the trend-lines are jut slanted areas of support/resistance so profit taking should be set around these key levels. Not only that, the future price action must be anticipated as the price could be lining up for a third bounce on the outer/long term trend-line in order to perform the next leg (Bullish in this case).

1112.jpg
31113.jpg
31114.jpg
31115.jpg

Rules to trading the sell zone:

  • Find and draw all trend-lines. Inner, outer and long-term as this will help you to determine if the market is in an uptrend, downtrend or if a trend line has been broken signifying the potential end of a trend and reversal.

  • Find the uptrend line break and the bearish candle in the sell zone.

  • Find the back side of the uptrend line (resistance) to see if it is lower than the last high, giving you a high probability trade setup.

  • Establish the last high in order to determine where your protective stop loss will be placed.

  • Find the outer uptrend line as well as support to determine where the market may go for profit taking.

  • Figure out the latest A,B,C,D's and find the D extension.

  • Stop loss shall be placed 15-30 PIPs above the 3rd bounce candlestick reversal.

Rules to trading the buy zone:

  • Find and draw all trend-lines- Inner, outer and long-term as this will help you to determine if the market is in an uptrend, downtrend or if a trend line has been broken signifying the potential end of a trend and reversal.

  • Find the downtrend line break and the bullish candle in the buy zone.

  • Find the back side of the downtrend line (support) to see if it is higher than the last low, giving you a high probability rade setup.

  • Establish the last low in order to determine where your protective stop loss will be placed;.

  • Find the outer downtrend line as well as resistance to determine where the market may go for profit taking.

  • Figure out the lat est A,B,C,D's and find the D extension.

  • Stop loss shall be placed 15-30 PIPs below the 3rd bounce candlestick reversal.

Breakout, Retest, Continuation:

Upon a breakout of a trend-line, the price will tend to pull back toward the line to retest it as a new support zone as displayed below. Vice verse for a descending channel break. Its handy to draw a thin strip across the new high and await a clear continuation before executing the trade. (To be more conservative)

31116.jpg

Counter trend-line application:

Counter trend-lines (C.T.L's) are highly important., when placed accurately they can provide brilliant trade setups for trend trading. Counter trend-lines shall be placed on the H4 chart + H2 chart once the key levels and overall trend-lines have been placed on any specified currency pair. They are known as 'counter' trend-lines as they are pulled from low to high on a bearish pullback and high to low at a high to low on a bullish pullback. For instance; as soon as the C.T.L is broken (alongside the M.A crossover) and a fully formed & closed candlestick has been formed above/below the C.T.L we execute a trade in the trend direction. Most of the time we anticipate a new low/new high to be formed upon a C.T.L break. An example is shown below .

31117_edited.jpg
31118.jpg

Channel Trading: 

 

Parallel channels are one of the most common chart patterns found on the charts. They provide the trader with excellent opportunities for high probability trade setups regardless if the market is in a trending or a non-trending state and are not timeframe dependant. 

channeltrading02 2.jpg

Horizontal channels on the other hand are known as 'trading ranges' or 'consolidation' which we went through in detail prior to this section. No matter what the current condition of the market may be, there are always parallel channels present whether they be horizontal, upwards (ascending) or downwards (descending) as displayed in the examples below.

channeltrading01.jpg

Parallel channels can be defined as soon as you find two top and two bottoms (they are marked with yellow boxes on the chart).As soon as you find such channel, you can use the following trading strategy: you must wait until the price on the chart is close to either the upper or lower trend line in order to determine the setup. Check out the Descending channel below.

channeltradingpage14-pic.jpg
bottom of page