They are used to give indications as to the immediate trend and indicate when a trend has changed. They can also be used as support and resistance trend lines how to do provide opportunities to open and close positions. Drawing trend lines The chart below shows an example of a trend line in a downtrend and an uptrend.
The Utility Of Trendlines
Shows three swing highs on the downtrend Shows three swing lows on the uptrend When drawing trend lines in a downtrend, you draw them above the price.
When you draw trend lines in an uptrend, you draw them below the price. It is the highs on a downtrend and the lows on an uptrend that will determine a trend line. At least two swing highs or swing lows are needed to draw a trend line in either direction.
Interpreting a trend line
However, for a trend line to be valid, at least three highs or lows should be used. Essentially, the more times the price touches a trend line, the more valid it is, because there are more traders using them as support or resistance.
But one question still lingers among Forex traders — how to draw trend lines? What Are Trend Lines? As the name implies, trend lines are levels used in technical analysis that can be drawn along a trend to represent either support or resistance, depending on the direction of the trend. These trend lines can help us to identify potential areas of increased supply and demand, which can cause the market to move down or up respectively. Notice how in the GBPUSD daily chart above, the market touched off of trend line support several times over an extended period of time.
Using the trend lines how to do or bodies of the candles To draw trend lines, some traders use the bodies of the candlesticks, while others prefer the wicks. While the majority of people will use the wicks to draw trend lines, the use of the bodies is an acceptable way to draw trend lines on a chart. The chart below shows a trend line drawn using the wicks of the candlestick.
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The next chart below shows a trend line drawn using the bodies of the candles. Either of these are acceptable. Trend lines are subjective, so use what you feel comfortable with.
The Complete Guide On How To Use Trendlines
However, it is important not to deviate from the method that you choose. Using trend lines to trade There are two predominant methods in which to trade using trend lines: Entering when the price finds support or resistance at the trend line Entering when the price breaks through the trend line Trend line as support or resistance If a trend line has been identified and it is holding as support or resistance, then you can use the trend line to enter into the market once the price comes back to it.
Short entry after the price finds resistance at the trend line Stop loss above the trend line The chart above shows the trend line being used as resistance and the price using it to find an entry.
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A stop loss can be put on the other side of the trend line. The size of the stop loss depends on the strategy involved.
Trend line break The trend line break method uses the actual breakout of the line to determine an entry.
When the price breaks through a trend line, it is no longer valid as support or resistance and it is likely that the price will continue to reverse direction. There are two ways to enter using a trend line break: an aggressive entry and a conservative entry. An aggressive entry An aggressive way to enter using a trend line break is to enter as soon as the candle breaks through and closes on the other side of the trend line.
Short entry after the price broke through the trend line to the downside Stop loss is placed above the trend line The chart above demonstrates that once the candle closes on the other side of the trend line, then you can enter immediately. A stop loss can be placed on the other side of the trend line.
A conservative entry A more conservative way of trading the trend line break is to wait until the price has broken through the trend line and then tested from the other side as either support or resistance. Price breaks through the trend line to the downside Wait for the price to come back to the trend line and find resistance Once determined that the breakout is true, enter into a short entry Stop loss is placed above the trend line The chart above shows a trend line that has been broken after acting as support.
The price then tested it from the other side as resistance, further confirming that the breakout is likely to continue. After the trend line has been tested as resistance, you can enter a short position and place a stop loss on the other side of the trend line.
Caution using trend line breaks In order to trade a breakout of a trend line, it is a good idea to wait until a candlestick actually closes on the other side, or tests the other side of the trend line as either support or resistance. Without a close on the other side of the trend line, it is generally not considered an actual break.
False breakout In the above chart, the price moved below the trend line. However, it retraced and the candlestick closed above the trend line.
If a trader entered as soon as the price broke through, it would have been a losing trade. Summary So far, you have learned that: trend lines are drawn at an angle and are used to determine a trend and help make trading decisions.