Trend lines have become widely popular as a way to identify possible support or resistance. But one question still lingers among Forex traders — how to draw trend lines? As the name implies, trend lines are levels used in technical analysis that can be drawn along a trend to represent either support or resistance, depending on the direction of the trend.
These trend lines can help us to identify potential areas of increased supply and demand, which can cause the market to move down or up respectively. Notice how in the GBPUSD daily chart above, the market touched off of trend line support several times over an extended period of time.
This trend line represented an area of support where traders can begin to look for buying opportunities. The difference is that the trend line above represents a downtrend, during which time it acts as resistance, giving traders an opportunity to look for selling opportunities. The very first thing to know about drawing trend lines is that you need at least two points in the market to start a trend line. Once the second swing high or low has been identified, you can draw your trend line.
Notice in the chart above, we have two main points at which we can start to draw our trend line. Once this level has been established, we can start to look for bullish price action to join the rally. This gave traders an opportunity to buy at support to join the rally. This brings me to a very important rule regarding trend lines.
The longer a trend line is respected, the more important it becomes. Notice how the market formed a bullish pin bar at the third touch from this trend line. This is a perfect example of the type of buying opportunity a trader would look for using trend line support.
Another higher time frame that I like to use to draw trend lines is the weekly chart. This time frame is great for identifying potential targets during uptrends or downtrends on the daily time frame. The answer to this question depends on the trend line. Notice how the trend line above does not perfectly line up with the highs of each candle, nor does it line up perfectly with the open or close of each candle. This brings me to the most important part about drawing trend lines, or any support or resistance level for that matter.
The best trend lines are the most obvious ones. Moreover, this method can help you spot potential reversal points in the market.
At this point in the lesson, you know that a trend line can be used to identify potential buying or selling opportunities. But this only works as long as the market continues to respect the trend line as support or resistance. This is where you have a chance to trade a market as it makes a turn from a major swing high or low. However once the market broke trend line support, it quickly retested former support as new resistance.
Notice how shortly after breaking trend line resistance, the market came back to retest the trend line as new support and formed a bullish pin bar in the process. This gave price action traders an opportunity to buy just before the market rallied for pips. This is a great way to use trend lines to spot potential reversals in the market.
I hope this lesson has given you a better understanding of how to draw trend lines and how they can be used in the Forex market. It contains the four keys to drawing these levels accurately.
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