Basic trend line tutorial for new traders.
Traders use trend lines for many reasons including, but not limited, to the following:
- Identifying reversal areas. Pinpoint levels where reversals may occur
- Identifying breakout areas. These signal that a change in trend may be imminent.
- Defining a trend.
- Trailing stop losses.
- Adding to positions.
- Confluence with other technical signals.
Drawing a trend line
Lets start out with a naked forex chart. This 1 hour Euro dollar chart shows an uptrend and I can see multiple higher lows – which will highlighted on chart number 2.
So moving on to the next chart. I have now defined the swing low points (higher lows) in the uptrend which are highlighted in blue.
Each one of these was reasonably significant and is noticeable. This is important as we want to add trend lines that other traders will see. This is vital if the order flow is to be in place when we commit to a trade.
So how do I draw a trend line?
We finally add the ascending trend line.
It’s as easy at that!
Notice how the first three touches were all very precise hitting the trend line on this forex chart. The more precise the trend line touches, the better in my opinion.
Here are a few other tips to help identify and draw trend lines
- The more touches a trend line has the more relevant it becomes. Other traders will see this trend line and potentially be placing orders around it. This helps with the self fulfilling prophecy element of a trend line trade and the order flow.
- The trend line should be defining some kind of trend / range.
- Just because a trend line breaks it doesn’t mean the market will reverse for 1000 pips! If the right trend lines are taken they can be ideal for stealing a reasonable amount of pips though. If you are going for the home run don’t forget to trail the stop loss!
- 3 touches are required to confirm the trend line. More touches are a bonus. I sometimes draw a trend line with two touches if anticipating a third touch reversal due to confluence. However, this is an advanced technique.
- It is preferable for the touches of the trend line to display a strong reversal each time they hit. This is of course relative to the current market conditions.
Trend lines should be used with other technical analysis techniques in order to maximize potential of a trade working in your favour.