T
rend lines are very often used for making technical analysis in forex trading.
They show if there is an upward and a downward trend.
You should learn how to draw them correctly, so they can be as accurate as any other method.
There are three types of trends:
Uptrend (higher lows)
Downtrend (lower highs)
Sideways trend (ranging)
The uptrend line is obtained by merging a straight line with two or more peaks in support areas.
Also known as an ascending trend line.
The downtrend line is obtained by merging a straight line with two or more peaks in resistance areas.
Known as a descending trend line.
How do you draw trend lines?
Simply connect the two major bottoms or tops with a straight line. You can even give your kid to do it.
Since this line is very easy to identify, there is a tendency between traders to draw a straight line between any two low points in an uptrend, or any two high points in a downward trend and call these lines “trend lines”. They may indeed be trend lines, but they may not be and they are just giving false signals.
To make sure that these lines are really trendy, we need to use two relatively simple rules:
- If the price bounces three or more times from one line, then this line is probably a really valid trend line.
In practice, this happens after we have already drawn a line between two points and on the continuation of this line there is a price rebound at another point.
It is obvious that the more times the price bounces off this line, the more likely it is to be a trend line, and at the same time the crossing of this price line gives a valid signal for trend reversal.
For example, if we have an uptrend and the price bounced up after touching the trend line, this showed that the uptrend is still valid.
If the price breaks the trend line, it means that a reversal will follow and the uptrend will change to a downward one.
If we have a downtrend and the price bounces down after touching the trend line, this shows that the downtrend is still valid. If the price breaks the trend line, it means that a reversal will follow and the downward trend will change with an upward.
- The second rule concerns the use of the so-called “return line”. It runs parallel to the trend line.
If prices bounce back at least twice from the “return line”, it is almost certain that the assumed trend is valid.
It is important to know that trend lines are not always straight, although this is how we draw them for greater convenience.
Over time, higher-level trends tend to shift a little up or a little down, so when we draw a trend as a straight line, it may not go right through the top or bottom.
