What and How to Draw Trend Lines in Forex Trading Correct
Trend lines are one of the most basic technical trading tools used by traders to determine the direction of a trend and where it is likely that prices will change direction. To draw a trendline the trader will connect at least two extreme highs or lows.
You better learn about How to Identifying The Trends before reading this article
The following are examples of trendline lines that are on the weekly chart:
Trend Lines for Downtrend
The red trendline line on the chart is a depiction of a downward trend where the highest point of the price continues to decline over time. When the price moves down and then rises to touch the trendline, there is a rejection so the price goes back down in the direction of the trendline.
Trend Lines for Uptrend
The second chart above is an example of a trendline drawn on the uptrend. Prices continue to move up in the direction of the trendline.
Step by Step How to Drawing Trendlines Correct
Actually to draw a trendline there is only one rule, namely two extreme points that can be connected. Like the previous example, a bearish trendline requires two high points. Whereas the bullish trendline requires two low points. As long as the trader follows the rules, the trendline drawn will not be wrong.
How to know the trendline drawn is a strong trendline?
Maybe this is the question we need to ask. Drawing a trendline is easy, but how do you know one trendline is better than another?
With that question, we will explore three factors that determine the level of trendline strength:
- The first factor, in the world of technical analysis, the higher the time-frame chart used, the stronger the trendline line drawn. The trendline drawn with the monthly chart is stronger than the trendline on the weekly chart.
- The second factor is the slope of the trendline. The sharper the slope, the faster the trend will change. Try to imagine running on a treadmill machine. When the engine is set at speed 8.0 it will definitely make you tired faster than at speed 4.0. If you rarely exercise on a treadmill, surely soon will soon decrease the speed from 8.0 to 4.0.
The market is very fond of stability and consistent price movements, when there are drastic changes, soon there will be action to normalize the situation.
- The third factor, the more people see the same thing, the more likely it is to happen. So when we look at a chart and can point to a trendline clearly and ask 10 other people they can find the trendline easily. That is certainly the trendline that is influential and observed by many people.
Mistakes that occur when drawing a trendline
When drawing a trendline, sometimes traders can get confused. Is this drawn trendline correct? If it is correct, why is the price penetrating and not bouncing?
The question on this chart, which is the correct trendline? The answer is all true! It's just that the validity period of each trendline is not valid forever. Let's discuss, the pink trendline experiences two bounce-ups before it changes direction. Green Trendline has only one reflection. While the blue trendline does not seem to show any signs of reflection.
At this time the trader might protest and say the blue trendline is a trendline that is not true. But before saying it's not true, try to look more closely, prices continue to move up even though it doesn't always bounce on the trendline.
What is more appropriate to say is that the blue trendline has a higher risk because prices have broken down a lot. When prices penetrate in the opposite direction of the trendline, then the signs of a trend that is happening is experiencing weakening.
The reality is like in the following chart where the trend turns to bearish.
Generally, when novice traders see prices moving down as indicated at number 3, they will move the trendline line from point 1 to point 3. This is permitted, but it will create a trend that matches the logic which ultimately increases the expectations of the newly drawn trendline must persist .
The better thing to do is to leave the trendline in place and add a new trendline.
Another mistake that can occur in describing a trendline is connecting a high point to a high point on an uptrend or a low point to a low point on a downtrend. Although this is not prohibited, by doing so the trader violates an important essence in technical trading.
This essence is trading against the trend, maybe traders are confused by this statement. Now consider this chart
The question is, which is easier? Are short positions or long positions easier to make profits? If traders choose short, it will definitely be out of position and out of position because prices continue to move up consistently. If you choose long, just buy it once and sit still, the price will go up even if there is a swing up and down in the end up.
Use Trendline in Your Trading
Trading using a trendline can actually stand alone without the help of other indicators. Because the essence of the trendline is to make transactions in accordance with the direction of the currently developing trend.
By using a long time-frame chart the trendline drawn is getting stronger, the trader can simply enter the position when the price touches the trendline. But in the end if the trader is still in doubt, can add candlestick patterns before opening a position like in the following chart.
There are at least 3 bullish patterns that occur when prices intersect with the trendline and can be a reference for traders to make long positions.
Is a way to use a trendline that assumes a breakout of the trendline which is then followed by a retesting of the trendline and confirmation of the bounce. Traders will wait at the retest point to place a short position, in the opposite direction of the rising trendline.
Because this way of trading takes the turn point at the end, generally it can generate large profits because traders find the starting point of a new trend. But the disadvantage of this method is that prices often follow the trendline direction and continue the initial trend.
I hope this article is useful for your trading progress.
Maybe you need to learn too 7 Tips Forex Trading from Professional Trader
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