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CO12 - Introduction to Trend Lines

"Trend lines, as they indicate are lines drawn on the price chart to depict the trend in the price of a security. Within price action trading, trend line is the most simplest of all forms of technical drawings However, traders do not focus much on understanding how trend lines work. Using automated tools, traders simply look for a trend line to be breached. But there is a lot more going on than just a break of a trend line. In this article, we give you the basics of what a trend line is and also how you can plot the trend lines on a price chart. Getting a firm grasp on the trend line drawing concept is important. This is because trend lines also act as dynamic support and resistance levels. As a result, there is a lot of market context to be built up using trend line analysis. You can combine trend line analysis along with technical indicators to build a simple but effective trading system."

Trend lines are commonly used by technical analysts. The word trend and line simply means that a line that is plotted on the price chart. The line is used to depict the trend. Trend lines are important because they can tell you when the price of a security will break the trend and move in the opposite direction.

Drawing trend lines is very simple and easy. Of course, there are automated technical indicators as well. But it is always recommended that traders learn to draw the trend lines manually.

Similar to support and resistance, trend lines are also equally important. Depending on the length of the trend line, it can depict the major or the minor trend.

How to draw the trend line?

A trend line firstly classified into two types.

A bullish trend line is one that is sloping upwards. Here, the trend line is plotted by connecting two or more higher lows in price. You can also plot the trend line by connecting the higher closing prices as well. When price breaks this trend line, you can expect to see a change in the direction of the security’s price.

A bearish trend line is one that is sloping downwards. In a bearish trend line, the two lower highs are connected. Alternately, you could also use the two consecutive lower high closing prices as well.

A trend line is typically sloping at an angle of 45 degrees. However, you can find trend lines that have a steep incline as well. Such trend lines tend to snap easily, meaning that price breaks out from the extreme slope of the trend line.

The first chart below shows the bullish trend line. You can see that the trend line is plotted connecting the first two higher lows in price.

CO12 01 Bulliish trendline

Example of a bullish trend line

 

After the first two lows in price are connecting using the bullish trend line, you will notice how price starts to respect the trend line on subsequent retest to the trend line. However, eventually, as price reaches a new high, you can see how the trend line is breached.

The breakdown of the rising trend line indicates a potential change in the direction of the trend.

In the next example below, we have a bearish trend line. In this chart, the trend line is sloping, connecting the two subsequent lower highs that are formed.

CO12 02 Bearish trendline

Example of a bearish trend line

In the above chart, we have plotted two bearish trend lines. This is common because sometimes, the trend in the price is so strong that you will need to plot more than one trend line.

Regardless of the number of trend lines drawn, you will see that after price breaks the first trend line, it also needs to break the second trend line.

Trend lines act as dynamic support and resistance levels. This means that you should constantly keep an eye on the trend line and how price behaves when it nears these lines. There is no way of telling that price will change the direction of the trend. Sometimes, price can post a correction and then resume the direction of the previous trend.

Other times, price can break the trend line and in fact start a new trend.

Combining the horizontal support and resistance levels along with trend lines is a great way to trade the markets, while keeping the analysis simple.

Similar to support and resistance levels, when a trend line is breached, price tends to retrace back to the breakout level from the trend line. This retracement is a great way for traders to enter the trade with higher confidence.

Trend lines can lose their importance as price action continues to evolve. Furthermore, the trend line that has been tested multiple times and breached also loses its importance. Therefore, traders must constantly lookout for potentially new trend lines that will evolve as a result of price.

One of the biggest advantages of trend line trading is that they can be combined with other existing trading systems or technical indicators as well. Usually, an oscillator is a great technical indicator that you can use to understand the breakouts and the potential change of reversal in the direction of the price of a security.

Trend lines are one of the most important technical drawing tools that you can use. They are used in just about any market and works the same in different time frames that you use for analyzing the markets.

Therefore, learning how to draw the trend lines is a great way to understand price action to trade forex successfully.

Read 688 times Last modified on Thursday, 04 July 2019 11:38

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