trend lines trading

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Trend lines

Trend lines are lines drawn at an angle above or below the price. 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 and 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.

  1. Shows three swing highs on the downtrend
  2. 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.

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.

Using the wicks 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.

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. However, it is important not to deviate from the method that you choose.

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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.

  1. Short entry after the price finds resistance at the trend line
  2. 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.

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.

  1. Short entry after the price broke through the trend line to the downside
  2. 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.

  1. Price breaks through the trend line to the downside
  2. Wait for the price to come back to the trend line and find resistance
  3. Once determined that the breakout is true, enter into a short entry
  4. 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.

  1. 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.
  • in an uptrend, trend lines are drawn below the price and in a downtrend, trend lines are drawn above the price.
  • to draw a trend line in an uptrend, two lows must be connected by a straight line.
  • to draw a trend line in a downtrend line, two highs must be connected by a straight line.
  • a trend line should be connected by at least three highs or lows to make it valid.
  • the more times the price touches the trend line, the more valid it is.
  • trend lines can be used as support or resistance, in which case you can enter trades when the price touches the trend lines.
  • another way to trade using trend lines is a trend line break, where the price breaks through the trend line.

How To Use Trend Lines As A Trading Strategy

Trading with trend lines as your swing trading strategy uses the rhythm of the market and price action as the core of your trading strategy.

You can not go wrong with that.

Many price action traders will use trend lines as their way of determining everything from trend to reversal points. It’s not even necessary to actually draw them when you have enough experience as you can visualize them on your charts.

How Trend Lines Work

Trend lines are one of the most basic technical analysis tools around but powerful in their usage.

First, let’s look at trend lines in terms of defining a trend.

We all know that an uptrend has price making higher highs and higher lows. When we are talking about an uptrend line, we are referring to a trend line line that uses the higher swing lows and that defines the trend.

  • When price is moving up or down, it forms those higher swing highs and higher swing lows (uptrend) and lower swing highs and lowers swing lows (downtrend).
  • If you draw a trendline connecting a minimum of 2 higher swing lows, you have an upward trend line. The upward trendline generally trends to provide support.
  • The opposite is true when you connect a minimum of 2 lower swing highs, what you have would be a downward trendline. The downward trendline provides resistance.

This chart is using an uptrend line on a Forex chart and shows two examples of a trend line.

  1. The red line would be the first line you would draw. When price starts moving away and you have to cut through price, you will have to “fan” the trend line
  2. This is the new main trend line and you can see price bounced various times from the zones around the uptrend line.

Trend Lines In An Uptrend

Just because price comes close to the trend line, you will need some type of trade trigger or price action to get you into the trade.

Also know these are general rules. There are a few ways to draw your trend line and the key is consistency!

Understanding Trend Lines

It is one thing to simply draw a line on your chart but do you know why they may/may not be valid?

Every market, every Forex currency pair, they all have a rhythm to them. There will be times where price is following a general path and at other times, it will establish a different rhythm. It is this rhythm we are looking to exploit.

On this chart, you can see there are several trend lines drawn. This is due to a change in the state of the market as indicated by the arrows. At various points on this chart, the market will thrust to the upside, find a price point, consolidate, and push off again.

Fanned Trend Lines

That is the nature of each and every market and as a technical analysis tool, the simple trend line can show you , objectively, when this occurs.

What is also common, and you can prove this to yourself, is often times pullbacks in price are similar in price between each of them.

Trading With Trend Lines

The most common method of trend line trading is using them as support or resistance and trading the reversal off of either of them.

Buying Trend Line Bounce

For Buying A Trend Line Bounce

  1. Draw an upward trend line connecting a minimum of 2 higher lows (or higher swing lows)
  2. Wait for price to come come and touch the trend line at some stage down the future
  3. Place a buy stop order 2-5 pips above the high of the candlestick that touches the trend line
  4. Place your stop loss 2-5 pips below the low of that candlestick
  5. Place your pofit targets on previous significant lower swing highs (or peaks) that you see on the chart.

To summarize the buy off the trend line, connect two points and wait for the third touch for the trading opportunity.

For Selling A Trend Line Bounce

  1. Draw a downward trendline connecting a minimum of 2 lower highs (or lower swing highs)
  2. Wait for price to come come and touch the trendline at some stage down the future
  3. Place a sell stop order 2-5 pips above the low of the candlestick that touches the trendline
  4. Place your stop loss 2-5 pips above the high of that candlestick
  5. Place your pofit targets on previous significant higher swing lows (trougs) that you see on the chart.

Selling Trend Lines

The selling is the exact opposite of the buying – Look to trade the third touch of the trend line.

Trading Trend Line Breaks

There are 2 ways that trend line breaks can equal a trading opportunity

  1. Trade a longer term trend reversal
  2. Trade short term trend line breaks to get on the longer term trend

Here we have a down trend and we fanned the trend line due to the strong pushes down in price.

Trading Trend Line Breaks

Each time price pulls back towards the resistance trend line, we draw a support trend line on the pullback. The trade is on the break of the trend line.

On the far right of the chart, you can see the main trend line has broken. What do we do now?

We wait to see price retrace to test the former resistance trend line. Will it become support? We look for price action to tell us.

If we see a muted pullback, that is a great sign for an opposing trade.

Strong momentum in the pullback would have me standing aside until price action showed that there will be support coming into the market.

Trade Management

Trade management is a skill and probably one of the most important skills you will learn as a trader. Don’t be greedy with your profits when a trade is profitable. Learn to lock your profits by moving your stop loss and trailing it behind swing highs or swing lows that form as price moves in favor.

The reason for this is that there is less chance of you getting stopped out frequently as you are placing it behind support and resistance levels essentially.

Now, some people may decide to use profit targets while others will take more of a position trading approach with trend lines. They are trading the trend and will only exit when the trend has shown itself to be broken by a break in the trend line.

The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. -Ed Seykota

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 :

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