Trend lines are one of the most common forms of technical analysis. But are you drawing them correctly? If not, let me show you how.
There’s a vast array of different forms of technical analysis used to analyze the markets. And by far, the most common form used is that of support and resistance.
Before we get started, you can also watch my YouTube video where I explain how to correctly draw trend lines in Forex:
What are Trend Lines?
A trend line is a line drawn between two levels on a chart to express either support or resistance, depending on the direction of the trend. The more times price respects a particular trend line, the more significant that trendline becomes.
Based on these trend lines we can easily recognise potential areas of increased supply and demand that can contribute to a downward or upward pattern in the market.
How to draw Trend Lines?
I’ve found over the years of trading and teaching that there’s a lot of confusion on exactly how and where to draw the trend lines. And there two schools of thought here:
you can draw the trendline from the highs to the lows of a particular candle
you can take them from the closing price.
You can either do one or the other, but the point is to be consistent in your approach.
It’s useless to draw a trendline from the higher of one candle to the closing price of another candle and force them to fit the market. This will probably give you some inaccurate trading signals.
The first thing to consider when you draw trend lines is the direction of the trend, from where price has been to where it is going.
Let’s take a look at the trend line below:
For an uptrend market, the trend line will be placed below from where the price is, therefore acting as support.
If the market is trending down, then the trendline will be placed where the market price is, therefore acting as resistance.
Where to place the trend line?
One of the methods is to place the trend lines on the extreme points, the highs and the lows of a particular candle determined by the wicks.
The only problem is that the price is quite a way from where that particular trendline is drawn. That’s going to be the same if you’re plotting a down-trending market.
The other approach is the closing price using the line graph. The price is going to be trading much closer to the trend line by using the line graph and you’ll be able to easily recognize that on the candlesticks.
How to use trend lines in trading?
First of all, trendlines drawn with the closing price on a long-term chart are more effective and reliable. It could be used for breakout and for all types of charts.
Secondly, trend lines can also be used as dynamic support and resistance levels which constantly changing depending on recent price action. The uptrend line will be the support level, while the downtrend line will be the resistance level.
The price could either bounce off the trend line and continue the trend or it could breakout through the trend line and cause a reversal.
But these trend lines are just like your normal support and resistance lines, so the price won’t always bounce perfectly from the moving average.
When the level of resistance or support is broken, the following move should see prices follow through in the direction of the break. If prices break and fail to accelerate in that direction, this will be a sign of a false break out.
As with support and resistance, trendlines can also be either major or minor.
The major trendlines are going to be found on the higher timeframe charts. For example, on the daily GBP/YEN chart below it’s clearly an uptrend, so a trendline will show us an upside trend. This is a major trendline, so this may act as support.
Also, inside major trends, there can be minor trends. For example, on the chart above it is a minor downtrend in the major uptrend, so you can have minor trends inside major trends.
A trend line is a line drawn between two levels on a chart to express either support or resistance.
The higher time frames will always produce the most reliable trend lines
DO NOT draw trend lines and force them to fit into a market.
Trend lines can also be used as dynamic support and resistance levels
As always if you liked this blog, leave a comment below. Until next time happy trading and good luck! I hope to see you in the Trading Room.