They’re remarkably accurate and one of the most useful ways I’ve found to identify entry and exit levels.
I find them most accurate on the 1hour and daily charts, however you can use them on pretty much any timeframe down to the 5-minute chart.
Why do trendlines work?
Trendlines are easily identified and programmable (for those using an EA or algorithm), as a result, the majority of trades use them and they become self-fulfilling.
I’ve highlighted a recent bearish trendline on the AUDUSD here for you guys to see how predictable it can be. Each time price approaches the red line it pushes further down.
Now imagine thousands of traders around the globe making this same observation. What are they doing every time price approaches the line?
Selling (of course).
Which then pushes price down again, making a new lower low.
As you can see from this example, these trends don’t always a precise level. Often, you’ll see price bounce before it hits the trend line, or push through slightly before falling back into the long term trend. As a result, trend lines should only be one weapon in your arsenal, don’t rely on them solely.
A few other questions I’m often asked about trend lines:
Can trend lines curve?
I’ve observed other educators (not on our site!) drawing free hand on their charts like this:
Unless it’s for creative expression, don’t do this. These levels mean nothing.
Can a bullish market also have a bearish trendline?
You’re essentially asking if you can buy when the market is dropping, a bit like this:
If you were to sell around this red line, you’d be trading against the direction of the overall trend.
This is also what’s known as counter-trend trading, and not something I advise traders to do.
How do you know when a trend has changed?
Great question! As I said, the trend is your friend until the bend at the end. Predicting when the bend will happen is incredibly difficult, so when it does happen you need to be ready to cut your trade. If you picked up the trend early enough, you’ll have done very well up until that point and should still exit the overall position profitably.