Learn Forex: How to Trade Trendlines.
by Walker England, Trading Instructor.
Support and resistance levels are considered one of the most used technical tools in the Forex market. These charting points can be used to find out which direction to trade, time entries, as well as to establish position exits. More often than not these convenient levels are found through drawing lines inside of our graphing software, so today we are going to focus on drawing trendlines on the chart.
When you begin drawing trendlines it is important to remember that not every trader will draw their line the same. Where you draw your lines may not be exactly where I place mine. This is ok as long as we remember the key rule that trendlines must connect at least two common points on our chart. Let’s take a look at a few examples.
Above we can see our first example using a weekly chart of the NAS100 (Nasdaq). The NAS 100 is considered in an uptrend as it has moved 1832 points higher over the course of the last 42 months. Our first trend line is drawn by connecting a series of ascending low points on our graph, which are circled in green. This line is acting as support since price is expected to act as a floor in this scenario, with price holding at these levels.
Once this trendline is drawn, traders will look to take advantage of new higher highs by creating buy orders. The optimal time to take new long positions in an uptrend occurs when price trades down to support and bounces. Once prices has touched support but not closed below it, traders may look to establish new buy entries . When trading an uptrend, traders can also limit risk by establishing stop losses underneath support.
In our next example above we can see an 8Hour chart of the EURAUD declining in a downtrend. Notice how the resistance trendline is formed by connecting the highs on our graph marked in green. On this chart, prices have recently touched the resistance line for the 4th time. It is important to note that the more times a trendline is tested without breaking, the weaker it becomes. Due to this, trend traders normally prefer to trade trendlines on either the third or fourth test.
Since our trendline is pointed down and price is moving lower, we should consider the EURAUD in a strong downtrend. Trend traders can use this information to trade market swings by looking to sell new positions when price moves back up to resistance. Traders should look for prices to touch resistance but not close above it. When price begins moving back in the direction of the trend, we have a valid sell signal. In this scenario stop losses may be placed above support.
---Written by Walker England, Trading Instructor.
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Trend Lines.
Trend lines are one of the most basic concepts of day trading (and long term investing), and they are also one of the most powerful concepts. Trend lines have been used for trading for as long as there have been markets, and they are well suited to any type of market (stocks, currencies, commodity futures, etc.). Trend lines are based upon the idea that markets move in trends (sustained movement in one direction, and then sustained movement in the opposite direction).
Trend lines show the general direction of the price movement (upwards, downwards, or sideways), the strength of the current price movement, and where future support and resistance are likely to be located. In addition to being drawn on price charts (usually bar or candlestick charts), trend lines can be drawn on indicator charts (such as the CCI, TRIX, RSI, etc.), where they show the same information, but are based upon the indicator's values instead of the prices.
What are Trend Lines?
Trend lines show three distinct but related pieces of information about their market. They show the direction of the current price movement, the strength (or more precisely the speed) of the current price movement, and the future support and resistance of the current price movement. These pieces of information can be used independently of each other, or they can be used together as part of a larger trading system.
Each of these valuable pieces of information are described in detail in the following articles :
Direction of Price Movement Strength of Price Movement Support and Resistance.
Drawing Trend Lines.
Trend lines are straight lines that are drawn on graphical price or indicator charts. Upward trend lines are drawn on an upward diagonal from left to right (/), downward trend lines are drawn on a downward diagonal from left to right (\), and sideways trend lines are drawn horizontally from left to right (-).
The following tutorials explain how to draw each type of trend line :
Drawing Upward Trend Lines Drawing Downward Trend Lines Drawing Sideways Trend Lines.
Trading with Trend Lines.
There are many different ways of trading using trend lines, but two of the oldest ways are trend line bounces and trend line breaks. Trend line bounces are trend continuation trades, because they expect the price to touch the trend line and then reverse back to its original direction. Conversely, trend line breaks are trend reversal trades, because they expect the price to go through the trend line and then continue in its new direction. Even though they are opposite trades, both trend line bounces and trend line breaks are based upon trend lines being support and resistance, so many day traders trade both of these trades. The following tutorials describe trend line bounces and trend line breaks in detail :
How to Use Fibonacci Retracement with Trend Lines.
Another good tool to combine with the Fibonacci retracement tool is trend line analysis.
After all, Fibonacci retracement levels work best when the market is trending, so this makes a lot of sense!
So why not look for levels where Fib levels line up right smack with the trend?
Here’s a 1-hour chart of AUD/JPY. As you can see, price has been respecting a short term rising trend line over the past couple of days.
You think to yourself, “Hmm, that’s a sweet uptrend right there. I wanna buy AUD/JPY, even if it’s just for a short term trade. I think I’ll buy once the pair hits the trend line again.”
Here we plotted the Fibonacci retracement levels by using the Swing low at 82.61 and the Swing High at 83.84.
Notice how the 50.0% and 61.8% Fib levels are intersected by the rising trend line.
Could these levels serve as potential support levels? There’s only one way to find out!
Guess what? The 61.8% Fibonacci retracement level held, as price bounced there before heading back up. If you had set some orders at that level, you would have had a perfect entry!
A couple of hours after touching the trend line, price zoomed up like Astro Boy bursting through the Swing High.
Aren’t you glad you’ve got this in your trading toolbox now?
As you can see, it does pay to make use of the Fibonacci retracement tool, even if you’re planning to enter on a retest of the trend line.
Take note though, as with other drawing tools, drawing trend lines can also get pretty subjective.
You don’t know exactly how other traders are drawing them, but you can count on one thing – that there’s a trend!
If you see that a trend is developing, you should be looking for ways to go long to give you a better chance of a profitable trade. You can use the Fibonacci retracement tool to help you find potential entry points.
Your Progress.
Vision without action is a daydream. Action without vision is a nightmare. Japanese Proverb.
BabyPips helps individual traders learn how to trade the forex market.
We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We're also a community of traders that support each other on our daily trading journey.
Trend Lines.
Trend lines are probably the most common form of technical analysis in forex trading.
They are probably one of the most underutilized ones as well.
If drawn correctly, they can be as accurate as any other method.
In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).
In a downtrend , the trend line is drawn along the top of easily identifiable resistance areas (peaks).
How do you draw trend lines?
To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
Yep, it’s that simple.
Here are trend lines in action! Look at those waves!
Types of Trends.
There are three types of trends:
Uptrend (higher lows) Downtrend (lower highs) Sideways trends (ranging)
Here are some important things to remember using trend lines in forex trading:
The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.
Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.
And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn’t a valid one!
Your Progress.
We first make our habits, and then our habits make us. John Dryden.
BabyPips helps individual traders learn how to trade the forex market.
We introduce people to the world of currency trading, and provide educational content to help them learn how to become profitable traders. We're also a community of traders that support each other on our daily trading journey.
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