Trend lines are one of the most basic technical analysis tools. These are the foundations of any chart patterns and the basis for most investment analysis.
What Are Trend Lines
Trend lines are simply Support and Resistance lines. Unlike traditional Support and Resistance levels which are horizontal, trend lines are sloped – Rising or Falling, indicating the overall longer term trend..
Support and Resistance trend lines GBPUSD
Support and Resistance trend lines EURUSD
Identifying Trend Lines
How can you identify trend lines correctly?. All rules rely on a proper identification of Upswings and Downswings. Upswings are candlestick that are higher than all candles around them. Downswings are candle that are lower than all candles around them.
After the identification of upswings and downswings, a guide line to identifying the Trends early After identifying 2 consecutive swings – connect the two with a line (trend line).
This implies that every two swings are connected with a line, It ensures that you will have the fast identification of a trend. Many of the trend lines drawn this way will not be continuing trends however, as the price approaches one of these lines and bounces, you will have stronger indication of where to take a position. The more touches of the trend line the stronger the trend.
Strength of the trend
The power of trend lines is drawn from the ability to make price bounce when it hits them. The quicker and stronger the bounce, the more powerful the trendline. Many beginners make the mistake of looking only at the upswings and downswings and disregarding the strength of the bounce. If a price did not react for several bars before touching the line, it is showing signs of weakness, therefore may be better not to take position until further confirmationMake sure that reversal happens at the very next bar after the touch of the trendline.
Number of Touches
The more times trendline has been touched by the price, the stronger it is. The minimal touches for a trend line is two, generally with a position entry at the 3rd touch (after confirmation).
Resistance trend line was tested 4 times; hence it is a strong trend line however, be aware this is a Daily chart and a long period of time for a day/intraday trader to follow. Be very aware of timescales.
Support trend line has been tested 3 times
How To Trade Trend lines
Trend lines traded the same way as Support and Resistance levels, however, when trading trend lines, an investor must pay attention not only to the current trend line, but to its reciprocal.
If you are trading a support trendline, you should look for the Resistance trendline and find out their relation and which Chart Pattern they form, etc
The most used technique of trading trend lines is, wait for price to touch a valid line (that was tested at least twice), and perform a bounce. More precise entry points can be signaled by
Make sure you identify the reciprocal trend line and look for the pattern. Chart Patterns can give you identification and conformation of the direction of the breakout, and you should aim at taking bounces only in the general direction of patterns. Moreover, take long bounces on ascending Trend lines and short trades at Descending trend lines. This allows you to always trade with the overall general trend. The only exception to this rule is the “Megaphone”, in which an investor can take more aggressive positions against the direction of trend.
Bounce trade on Support trend line.
Short bounce trade on Resistance trendline.
Breakout and Pullback
This is a well-known strategy for trading Support and Resistance levels, and it also applies to Trend lines. Breakout traders attempt to catch new trends after a breakout of a trend line While breakouts can be profitable, trading them is tricky as there are ‘fake outs‘ in day trading. This is the best way to trade breakouts is simply to wait for price to perform a pullback to the trendline. This is a higher quality trade with much higher probability for success.
Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument.