Trading Trend Lines Tips

How are Trend Lines Defined?

Trend lines are angled lines that may be put on price charts to link swing lows or swing highs. A trend line may sometimes link both swing highs and lows.

Technical analysts build trend lines with the expectation that they will become key points when price hits them, providing a chance to initiate a high-probability, high reward-to-risk ratio trade at that time. While the majority of trend lines are produced with the intention of entering a reversal (fade) trade, they may also be used to detect and trade breakouts.

There are four fundamental kinds of trend lines:

1. A upward trend line (bullish) linking swing lows

2 . A descending trend line (bearish) linking swing lows

Constructing Trend Lines

1. Draw a trend line with a minimum of two touches, but do not trade it until the result of the third touch is evident.

2. Begin with the higher time frames, linking swing lows and swing highs. While a trend line that is many weeks or days old is significant, one that is just a few minutes or hours old is meaningless unless it is a critical component of a larger technical picture.

3.  If the price has broken the trend line significantly since the minimum of two touches was created, the trend line is no longer legitimate – thus draw just what has not been invalidated by more recent price history.

4   The more symmetrical the time and price fluctuations connecting the trend lines, the more objective the trend line is likely to be.

5. The higher the trend line, the worse the quality. On the other hand, the more gradual the slope, the more successful it is likely to be.

6. Once you have determined where a suitable trend line may be formed, zoom in to the smallest time period feasible and be exceedingly precise while drawing the line. A trend line should link the extremes of as many points as feasible. This implies that if there are three touches but the third contacts a little too far, the line should be drawn to precisely hit the extremes of the first two locations while allowing for the third touch's overshoot. Make no attempt to "average" the touches.

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7. When a trend line is not hit for a time that is much longer than the longest gap between any two prior touches, it has most likely lost importance.

8. If a trend line is reached and can be readjusted to better match the points on which it touches, do not be afraid to alter and redraw the trend line.

9. If a parallel trend line can be formed above or below an existing trend line with a comparable ascending or descending angle, it is likely to be an effective trend line; thus, draw it. You now have a price channel, and if you are trend trading, you will have an apparent exit and entry point! Consider the following example of a channel:

Using Trend Lines to Trade - An Overview

Once your trend lines are formed and you maintain them by removing invalidated lines, correcting lines that have been crossed, and adding any new excellent lines that emerge, you just wait for the price to cross one of the trend lines. It is critical not to "push" trend lines into your chart: most of the time, your chart will lack any high-quality, clear trend lines. In general, and particularly in Forex, trend lines are more effective for detecting likely reversals than breakouts, unless when they run up against an exceptionally evident and powerful trend in the other direction. In both circumstances, it is preferable to wait for price action confirmation of the breakout or reversal, as necessary, using Japanese candlestick / price action analysis, rather than placing stop or limit orders prior to the touch and hoping for the best. As a general rule, steeper trend lines and trend lines that have been violated often (especially with a rising frequency of violations) are more likely to break than hold.

Breakouts

Outside putting a stop order just beyond the line without any confirmation price action, the most aggressive way is to simply wait for the price to produce an extremely bullish or bearish candle (as necessary) that cleanly breaks above the trend line in the desired direction. This strategy works best with really powerful breakouts in which the price does not reverse for a period of time after the breakout. A more cautious approach would be to let the breakout to occur and then wait for the price to reverse and contact the trend line on the opposite side, ideally forming a fresh candlestick clearly rejecting the broken trend line. A excellent illustration of this kind of setup is provided below:

The aggressive strategy will result in more lost trades, but no wins will be missed, and you will secure early entry, resulting in a higher return to risk ratio. The cautious method should result in a higher winner-to-loser ratio, albeit it will undoubtedly miss some large wins. One way to boost the chance of a breakout trade is to verify that the price is making more significant higher lows than highs (in the case of a bullish trade) or vice versa (in the case of a bearish trade) (for a bearish trade).