How To Draw The Best Trend Lines

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Trend lines

Trend lines are lines drawn at an angle above or below the price. They are used to give indications as to the immediate trend and indicate when a trend has changed. They can also be used as support and resistance and provide opportunities to open and close positions.

Drawing trend lines

The chart below shows an example of a trend line in a downtrend and an uptrend.

  1. Shows three swing highs on the downtrend
  2. Shows three swing lows on the uptrend

When drawing trend lines in a downtrend, you draw them above the price.

When you draw trend lines in an uptrend, you draw them below the price. It is the highs on a downtrend and the lows on an uptrend that will determine a trend line.

At least two swing highs or swing lows are needed to draw a trend line in either direction.

However, for a trend line to be valid, at least three highs or lows should be used. Essentially, the more times the price touches a trend line, the more valid it is, because there are more traders using them as support or resistance.

Using the wicks or bodies of the candles

To draw trend lines, some traders use the bodies of the candlesticks, while others prefer the wicks. While the majority of people will use the wicks to draw trend lines, the use of the bodies is an acceptable way to draw trend lines on a chart.

The chart below shows a trend line drawn using the wicks of the candlestick.

The next chart below shows a trend line drawn using the bodies of the candles. Either of these are acceptable.

Trend lines are subjective, so use what you feel comfortable with. However, it is important not to deviate from the method that you choose.

Using trend lines to trade

There are two predominant methods in which to trade using trend lines:

  • Entering when the price finds support or resistance at the trend line
  • Entering when the price breaks through the trend line

Trend line as support or resistance

If a trend line has been identified and it is holding as support or resistance, then you can use the trend line to enter into the market once the price comes back to it.

  1. Short entry after the price finds resistance at the trend line
  2. Stop loss above the trend line

The chart above shows the trend line being used as resistance and the price using it to find an entry.

A stop loss can be put on the other side of the trend line. The size of the stop loss depends on the strategy involved.

Trend line break

The trend line break method uses the actual breakout of the line to determine an entry. When the price breaks through a trend line, it is no longer valid as support or resistance and it is likely that the price will continue to reverse direction.

There are two ways to enter using a trend line break: an aggressive entry and a conservative entry.

An aggressive entry

An aggressive way to enter using a trend line break is to enter as soon as the candle breaks through and closes on the other side of the trend line.

  1. Short entry after the price broke through the trend line to the downside
  2. Stop loss is placed above the trend line

The chart above demonstrates that once the candle closes on the other side of the trend line, then you can enter immediately. A stop loss can be placed on the other side of the trend line.

A conservative entry

A more conservative way of trading the trend line break is to wait until the price has broken through the trend line and then tested from the other side as either support or resistance.

  1. Price breaks through the trend line to the downside
  2. Wait for the price to come back to the trend line and find resistance
  3. Once determined that the breakout is true, enter into a short entry
  4. Stop loss is placed above the trend line

The chart above shows a trend line that has been broken after acting as support. The price then tested it from the other side as resistance, further confirming that the breakout is likely to continue. After the trend line has been tested as resistance, you can enter a short position and place a stop loss on the other side of the trend line.

Caution using trend line breaks

In order to trade a breakout of a trend line, it is a good idea to wait until a candlestick actually closes on the other side, or tests the other side of the trend line as either support or resistance. Without a close on the other side of the trend line, it is generally not considered an actual break.

  1. False breakout

In the above chart, the price moved below the trend line. However, it retraced and the candlestick closed above the trend line. If a trader entered as soon as the price broke through, it would have been a losing trade.

Summary

So far, you have learned that:

  • trend lines are drawn at an angle and are used to determine a trend and help make trading decisions.
  • in an uptrend, trend lines are drawn below the price and in a downtrend, trend lines are drawn above the price.
  • to draw a trend line in an uptrend, two lows must be connected by a straight line.
  • to draw a trend line in a downtrend line, two highs must be connected by a straight line.
  • a trend line should be connected by at least three highs or lows to make it valid.
  • the more times the price touches the trend line, the more valid it is.
  • trend lines can be used as support or resistance, in which case you can enter trades when the price touches the trend lines.
  • another way to trade using trend lines is a trend line break, where the price breaks through the trend line.

Trend Lines

Trend lines are one of the most basic concepts of day trading (and long term investing), and they are also one of the most powerful concepts. Trend lines have been used for trading for as long as there have been markets, and they are well suited to any type of market (stocks, currencies, commodity futures, etc.). Trend lines are based upon the idea that markets move in trends (sustained movement in one direction, and then sustained movement in the opposite direction). Trend lines show the general direction of the price movement (upwards, downwards, or sideways), the strength of the current price movement, and where future support and resistance are likely to be located. In addition to being drawn on price charts (usually bar or candlestick charts), trend lines can be drawn on indicator charts (such as the CCI, TRIX, RSI, etc.), where they show the same information, but are based upon the indicator’s values instead of the prices.

What are Trend Lines?

Trend lines show three distinct but related pieces of information about their market. They show the direction of the current price movement, the strength (or more precisely the speed) of the current price movement, and the future support and resistance of the current price movement. These pieces of information can be used independently of each other, or they can be used together as part of a larger trading system. Each of these valuable pieces of information are described in detail in the following articles :

  • Direction of Price Movement
  • Strength of Price Movement
  • Support and Resistance

Drawing Trend Lines

Trend lines are straight lines that are drawn on graphical price or indicator charts. Upward trend lines are drawn on an upward diagonal from left to right (/), downward trend lines are drawn on a downward diagonal from left to right (\), and sideways trend lines are drawn horizontally from left to right (-). The following tutorials explain how to draw each type of trend line :

  • Drawing Upward Trend Lines
  • Drawing Downward Trend Lines
  • Drawing Sideways Trend Lines

Trading with Trend Lines

There are many different ways of trading using trend lines, but two of the oldest ways are trend line bounces and trend line breaks. Trend line bounces are trend continuation trades, because they expect the price to touch the trend line and then reverse back to its original direction. Conversely, trend line breaks are trend reversal trades, because they expect the price to go through the trend line and then continue in its new direction. Even though they are opposite trades, both trend line bounces and trend line breaks are based upon trend lines being support and resistance, so many day traders trade both of these trades. The following tutorials describe trend line bounces and trend line breaks in detail :

How to Draw Levels, Trend Lines and Channels

Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course on the first module, Technical Analysis 101. On this lesson, you will learn how to use and draw levels, trend lines and channels. We’re going to jump right into the N.T.4. platform because there’s no better way to show you these than actually doing it.

Okay, traders, we are back. Here, we have the G.B.P./U.S.D. daily chart and the first thing we need to go through is what levels are we going to be using. There are a lot of technical analysts out there that will tell you that you need to draw every single one of these quarter resistance levels on your charts. I’m here to tell you that this is wrong. You only need to draw the important levels on the daily and four-hour chart, because if you start drawing every single level from the 4-hour chart to the 15-minute chart, you will end up with a lot of lines on your chart and you will be unable to take a profitable trade and to let your profitable trade run.
I’m going to guide you step by step on what to do when you are in front of a naked chart just like this one. Remember here, we are just going to learn how to draw them and use them.

The first thing you need to do is go to the daily chart and look for the first high if you are in an uptrend or the first low if you are in a downtrend. Why are we looking for the first high and the first low? Because remember that in an uptrend, the supply areas get taken out, and in a downtrend, the demand areas get taken out. So we are going to draw levels that might get taken out and levels that might hold.

Here, we are in an uptrend. You can see here that this area right here is being tested very strongly. You can see that, here, we have a long, wicked candle that goes all the way up here. That’s a huge week, a 77 pip week. This means that this candle opened right here, price moved about 94 pips to the upside and then closed just 16 pips from the opening price. This gives us rejection, guys. You can correctly assess that here we have a strong resistance area, so you’re going to grab your horizontal line two and you’re going to draw a horizontal line right at the body of the candle.

We are going to use the bodies of the candles for our horizontal lines because the rejection or the week highs really don’t matter to us in support and resistance. They do matter once you take the trade because we are going to use them, the highs and the lows, as our stop loss levels but we are going to go through that on another lesson.

If we continue with price action, you can see that we do have some support and resistance levels but they are very mild because they get taken out very quickly. This is what I’m talking about, guys. You need overall levels. You need big levels. You need levels that have been tested countless times and levels that were tested at support and now being tested at resistance. This is not the case. You can see that we went all the way up here and this candle closed above our level of resistance but did not take this high. Just after this candle, we have a huge 140 pip candle to the downside. This is what we call a fake out.

Like here, right here, we have a long, wicked candle, 166 pip with a very small body that signals rejection. Right now, we are using this level of resistance as a trading level because we can short this currency pair with it.

Now we are not only going to use support and resistance levels to short. We are going to use trend lines. Because right now we are in an uptrend, we are going to go from this low to this low right here. Now this is how you draw a trend line. You can certainly draw… Let me figure this out for you guys because we are going to be looking on this very closely. We can certainly draw these trend lines from this week low through these weeks right here. As you can see, this trend line got taken out before moving up. This trend line is not valid anymore.

You need to focus on valid trend lines. Trend lines that have not been taken out just yet. Here, you can see that we have one, two, three, four weeks, five weeks with this 160 pip candle to the downside and this is a huge candle. You can see that the bearish pressure after this rejection is enormous. The candle did not break with the ascending trend line. Shorting at the end of this candle would be a terribly idea. Why? Because we are in ascending resistance. Remember that trend lines are just not lines that you draw on your chart, but they are ascending resistance and support.

What you need to wait is for a breakout, a retest of this ascending support as resistance. Right here when we test it, we have an entry to short the G.B.P/U.S.D.

This is basically how you use levels and trend lines to trade currency pairs. Of course you can use these methods… You can use these on any asset and you will use it on any asset that you are monitoring or that you want to trade. This is just basic support resistance and breakout strategy. When we have breakout, we have momentum, in this case, to the downside.

If you want to move things further you can see that we were actually in an ascending channel. You can clearly see that from this low, we retested these… What I did here, guys, is I just grabbed this trend line and made a parallel line to make it an ascending channel from this low. You can see that we clearly rejected it, tested it, which is now the top of the channel. Before coming up and before rejecting this area of resistance, the top of the channel and finally the breakout, the retest and the flush.

This trade would have yield at least 400 pips if you know how to hold onto your winners. Of course if you are one of these guys or if you listen to one of these analysts that draw support and resistance levels anywhere, you might just have gotten out 100 pips out of the move.

This is another thing. Here, you have to make sure to draw these level off support. Why this level of support? Because it’s the previous low that we made before rejecting this high. We can certainly assess that this is a range. The range is big enough to play this rejection, this breakout. As you can see here, when price comes all the way down to this resistance area at 5840, we have some Indecision Candles.

This is great because indecision candles not always mean that price is going to reverse. Sometimes Indecision Candles mean that price is going to continue, but we need a consolidation period, which is what is happening right now before moving lower or continuing with the flush in this case.

An idea here would have been to short right here at the retest of this ascending support as resistance and then take half of the position with 290 pip win. Move your stops here above this area of immediate support and let the rest run.

This is basically how you trade off levels. You just have to make sure to use the correct levels because if you were using these levels, for instance, as your first target, that would have been horrendous because this is not an actual level of… Well, it is a level of support but it’s not a strong level like the ones that I showed you. This is just the test back before the retracement and you see clearly that the first candle crosses below this low and we make new lows. The actual first target would have been here at this low and let the rest run. If you are okay with holding, you could have yield another 700 pips. Most of you guys would have been okay with a 290 pip win and I don’t blame you, because not too many traders can hold
trades for a week for a 300 pip win.

Basically this is how you use it. You just have to test and rinse and repeat and just draw your overall levels, your trend lines and trade breakouts with momentum.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

How can I draw trend lines on candlestick charts?

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If you want draw a trend line..

There must be at least reactions lows with the second lower high than the first.

There must me at least reactions highs with the second higher high than the first..

we can use it as support line for buying purpose..resistance line for selling purpose..As long as the trendline is not violated..the breaking of trend line is early sign of a change in a trend..

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