Trading the Trend Lines Guide
Trading with the trend lines is quite popular these days throughout the world. As the demands aren’t always the same and balanced, forex markets are likely to trend as supply. Because of this increased supply which is continued for over a certain period of time decreases the price. It happens because the sellers have to lower their prices in order to find buyers in the forex market. Likewise, when the demand increases it pushes the price of trades higher because the buyers keep increasing their bid prices to the highest levels. Trendline trading has a huge following in the forex market because of its wide range of efficient tools. If the trends are absent in the market, it is called a ranging market. As many of you are not well aware of the actual trading, so in this article we will guide you through the proper insights of trend lines in forex and help you understand the basics and in-depth concepts of trendline trading.
What are Trend Lines?
Trend Lines are basically one type of angled lines which can be drawn on the forex price charts by connecting low swings with other low swings, or by connecting high swings with other high swings. But often a trend line can be drawn by connecting both the high and low swings as well. Trendline trading has a quiet importance in forex trading as it is considered as one of the key points of determining the price-action analysis. Price-action analysis is done to forecast the future prices of the trades by focusing on past price-action and current market conditions. Drawing lines help the analysts to identify those points where the prices will reach in the upcoming days. Trendline trading also gives the traders an opportunity to enter into a high risk-reward ratio and high-probability trade. Though most of the lines are drawn to enter into the reversal or faded trade, still they can be used in identifying breakouts and trading in breakouts.
Types of Trend Lines
There are four types of trend lines popular in the forex market. Which are as follows:
- Bullish: Rising lines by connecting swing lows
- Bullish: Rising lines by connecting swing highs
- Bearish: Descending lines by connecting swing highs
- Bearish: Descending lines by connecting swing lows.
These four types of trend lines are used in trendline trading all over the world. But before using any one of them as your forex trading strategies , you must learn to draw them first. Otherwise, you won’t be able to utilize the effective essence of trend lines.
How to Draw Trend Lines?
Drawing trend lines precisely is one of the most difficult and important tasks of trendline trading. Here we are providing a step-by-step guide to draw lines properly as follows:
- You will require at least two touches in order to draw a trend line in forex. But you shouldn’t start trading with the two-touched trend line. Rather it would be better for you if you wait until the third one gets clear on the forex charts.
- Try to start with higher time frames because it will always keep you one step ahead of everyone. Then connect swing lows to other swing lows and swing highs to swing highs. Trend lines are still important even if they are days or weeks old. But lines which are few minutes or hours are valueless in forex unless it is an integral and impeccable part of a greater technical analysis.
- When the prices will actually violate the lines after the minimum two touches were drawn, then it won’t be a valid trend line from that very moment. Therefore go through the past price history properly so that you can only draw valid lines on the forex chart.
- If your price movements become symmetrical after connecting in both time and price, then your lines will likely to become more objective.
- If your trend line is steeper or lower, then your trading quality will be lower as well. Likewise, when your angle of the lines will be gentler, then your trading quality will become high and effective as well.
- After identifying the best place to draw a great trend line, then start drawing the trend line there after dropping down to the lowest possible time frame and try to draw it in the exact place. Then you should try to connect all the extreme points as far as possible to the exact thing on almost all the possible places. It means if you have to draw a trend line using three touches for example and your third touch moves a bit higher or lower, then you need to improvise by drawing that line in the exact way how the first two touches were drawn. But never draw the lines on the basis of the average between the touches.
- When a trend line will remain untouched for a long period, then it can lose its effectiveness and significance in case it lasts longer than the longest period between any two past or earlier touches of the trend lines.
- When a trade will be hit then it can be readjusted so that the touches can better fit into them. Never hesitate to readjust the touches and redraw the trend lines.
- If you can draw a parallel trading line above or under a trend line by keeping the similar ascending or descending angle as well, then it will certainly become an effective trend line for sure. Therefore, you should always keep that in mind while drawing the trend lines in forex. After that you will get a proper price channel and in case you are trading with the trend, then you will surely find both the places on the chart to enter and exit into the trade.
These are the key points and step-by-step guidelines to draw a trend line perfectly. Follow these instructions properly and you will be able to draw lines perfectly every time.
Trend Lines Breakouts
To let a trendline breakout, you need to wait for pulling back the price so that it can touch the trend lines from the opposite side. It will form a brand new candlestick pattern right away after rejecting the previously broken trend line. This aggressive and attacking breakout strategy will help you gain some more of your losing trades. At the same time, you won’t even lose or miss any winner trade as well. It will also offer you a secure and better entry option earlier by providing you a better reward/risk ratio. Though it can miss some big winning trades from the forex market, it still has the opportunity to get the better ratio to the winners.
Reversal Methods of Trend Lines
Reversal method of trend lines is an aggressive method by which basically puts a limit or restriction order where the trend line is so they can indicate the traders when it reaches close to it. But there is a slight chance of this method being problematic because this strategy is quite attacking and aggressive one where price level shifts on a regular basis. Therefore, prices move closer to the trend lines and reverses the price without even touching the lines. Therefore, it is a good decision if you can wait till a reversal is confirmed and assured by forex broker reviews or technical analysis. Then you will be able to identify the turn of the price movement and reversal as well. You will also get the opportunity to not to enter into the trade until the turn. It will help you decide when you should give up. Once you will be assured that the turn won’t show up, you must need to conclude it for your own benefit.
Trend lines in forex are of a great use and importance for identifying both the probable breakouts and reversals. Though it is more useful in case of reversals. But things can go wrong if there is a powerful and obvious trend in the opposite direction. This is why you need to deal with the whole scenario with your market knowledge. Therefore, you should wait for the technical analysis or price action analysis to confirm the reversal or breakout. As we learned earlier, steeper and lower lines are more likely to break than hold, you can use this knowledge in forex trading as well. We hope you have a clear concept on trendline trading after finishing this article.