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Bonus InstaForex

Bonus InstaForex

Trend line

Definition of trend line
Types of trend lines
How to build and see trend line
Interpretation of trend lines
Timeframe
Additional materials: Analytics
Dean Leo
* InstaForex Chief Strategist. In InstaForex from 2016
If you are a beginner in the Forex market and do not yet know how to trade, you should learn how to build a trend line. "Trading along trend lines is easy," says Dean Leo, chief specialist of InstaForex on trading strategies. We recommend you to make sure of this by learning how to build trend lines, and also get acquainted with trend line analytics provided by Dean Leo.

Determination of the trend line

To sum up, a trend is a major concept of market analysis. The thing of crucial importance for every investor is to identify an ongoing trend.
Trend lines are visual representation of support and resistance. A price moves inside the channel which they form. Trend lines enable a trader to answer the question about what trend is unfolding in the market.
A trend line is a concept of technical analysis, which is drawn on a chart like a channel. A price moves inside this channel since completion of the previous trend until the present time. The channel consists of the upper border or resistance and the lower border or support.

Types of trend lines

If an asset’s price makes higher highs and higher lows on a regular basis, these are signs of the upward trend.
If a price is developing an upward trend, a support line is considered the main trend line as a breakout of support southward signals completion of the trend.
Upward trend
On the contrary, if an asset trades with the downward trend, a price makes lower highs and lower lows.
In case of a downward trend, a resistance line is viewed as the main trend line because a breach of resistance northward indicates a trend reversal.
Downward trend
In case of the flat market, a price makes erratic moves without a clear direction. Borders of a trading range can be either horizontal or overlapping or going apart.
In case of a flat market (if an asset is trading sideways), the lines of support and resistance are of the same importance. If a price breaks out any line and holds behind it, this price action signals a beginning of an upward or downward trend.
Flat market
The rule of plotting a trend line. A trend line is drawn under pivot lows for an upward trend or over pivot highs for a downward trend. After the main trend line has been plotted (that is support for an upward trend or resistance for a downward trend), a trader should draw the second line parallel to the original line, so that a price chart is trapped between these lines. Thus, the channel consists of the two parallel lines. These are borders of the channel where a price has been moving recently. For a sideways trend, support and resistance lines do not have to be parallel.

How to build and see trend line

How to build and see trend line on price chart

Open a price chart (it is recommended to open a daily chart). By zooming in and out the chart, make it show the previous market conditions and the moment when the market shifted from it to the current trend.

For example, you clearly see that the price was trading in a range for a long time, broke the upper boundary above, and the uptrend started.

Or, for instance, the downtrend dominated the market for quite a long time, but the price broke the resistance above and entered sideways trading.

Now that you see the moment when the current trend started, try to determine what it is: uptrend, downtrend, or sideways trading.

If the current market condition lasts long enough (let’s say, at least 5 days), you will likely see the resistance, support, upper, or lower range boundaries. Draw the line or lines that you see clearly.

However, the previous market condition could have been broken only recently and the new condition (new trend) has only started and has not formed its boundaries yet.

You should understand that a trend cannot develop without retracements. Long trends without retracements are very rare but still possible. If a new trend is forming, remember that the new market condition consists only of a strong movement at first and you should wait for a retracement of at least 30% or a stop in the price movement (clearly visible on a daily chart). Only after that you can build a new trend line.

Remark. Despite the simplicity of the concept, a trader needs careful attention and experience of plotting trend lines on a chart. Though trend lines are drawn like borders of a channel, a trader can face tricky situations. For instance, in case of an obvious trend, a price goes along a support trend line that is clearly displayed on a chart. However, there is a so-called fake breakout at one point (or two-three points in the chart). It means that a price breaches a line by its shadow for a short while and immediately returns to the previous channel.

This is a dubious situation. Strictly speaking, we should draw a new support trend line after a new reversal point appears. Some traders will do this way. However, others will take no notice of this reversal point and carry on plotting the old support trend line. It is essential to understand that the rules of market analysis do not work out rigidly but statistically. In case the market behaves against the rules, traders should be ready to accept losses.

One of the pitfalls of work with trend lines is false breakouts. We often see how the price reaches the support level (during the uptrend), breaches the trend line, and sharply reverses alongside the trend. Sometimes, before the price continues moving alongside the trend, it tries to breach the trend line for several hours or days but then reverses alongside the trend. There is no point in trying to understand market participants who attempt to break the trend line. You should accept this market peculiarity as a rule. To understand whether the trend line is breached and whether the trend is broken, market participants often use a time filter. If the price closed a trading day at the other side of the trend line, this trend is considered to be breached.

How to interpret trend lines for trading

Trade alongside the trend. Trend - your friend.

Attempts to trade against the trend are one of the key reasons why traders and investors lose their money. Keep in mind that you should trade alongside the trend during an uptrend or downtrend.

  • Avoid sales during an upward trend
  • Refrain from buying during a downward trend
  • In case of sideways trading, you can sell and you can buy, but try not to buy near the upper boundary of the range and do no sell close to the lower boundary.

Your first task is to determine the market situation according to the price chart (uptrend, downtrend, or sideways trading).

The second task is to build support and resistance lines. For the uptrend, first draw the support line at price lows. Then draw resistance above and parallel to it.

Or

During the downtrend, first build the resistance line at highs and then draw the support below parallel to it.

Or

To get a range, build a support line on lows and a resistance line on highs.

Now we see the trend and have the resistance and support line. How to use it? The best points to open a buy deal during the uptrend are near the support line (place stop loss below the support). The target is at the opposite side of the channel, at the resistance line.

Or

The best points to open a sell trade during the downward trend are near the resistance line (place stop loss above the resistance). The target is at the opposite side of the channel, at the support line.

Or

During the sideways trading, the best points to open a buy/sell deal are near the support/resistance lines with stop loss beyond the line. Targets are at the opposite side of the range.

Conclusion

Opening trades at the best points according to the current trend gives you the best profit/loss ratio for your trading. Suppose, you trade with your system that is not based on trend lines. Still, a break of support or resistance will be a signal for you that the market situation might have changed and you should consider closing deals or, on the contrary, you can expect larger profits if you stay alongside the trend.

Timeframe

What time frame is the best for trend lines?

The daily time frame is the most important period for trend lines.

Our multiyear study of the market and trading shows that technical signals, such as a trend termination, trend formation, and others are stronger and more reliable on long time frames depicting these signals, trends, trading patterns etc.

On the one hand, a weekly, let alone monthly, time frame provides even more important data.

Example of a daily timeframe

However, signals on weekly and monthly charts lag significantly. It often happens that a trader receives a signal for the beginning of a trend when the movement has almost ended and the trader fails to open a deal and profit from this movement.

On the other hand, smaller time frames, from an hour and shorter, generate many false signals.

That is why we recommend you to use a daily time frame as a main one and an H4 time interval as an extra one for trading on Forex.

Example of a daily timeframe

Additional materials: Analytics