[Click here for Trend Line PDF]
Trend Lines
Trend lines are arguably the most common form of technical analysis, however they are often not used correctly, this is mainly because lot of traders draw them on incorrectly. If drawn correctly Trend lines can be quite accurate. Basically an uptrend line is drawn along the bottom of easily recognizable support areas. In a downtrend, the trend line is drawn along the top of easily recognizable resistance areas.
Drawing trend lines is probably the easiest thing you could do when Forex trading, all you have to do is locate two major tops or bottoms and connect them, simple. Below is some examples of what trend lines should look like.
How do you draw forex trend lines?
To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
What’s next?
Nothing.
Yep, it’s that simple.
Types of Trends
There are three types of trends:
Uptrend (higher lows)
Downtrend (lower highs)
Sideways trends (ranging)
Here are some important things to remember using trend lines in forex trading:
It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.
The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.
Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.
And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn’t a valid one!
Channels
If we take this trend line theory one step further and draw a parallel line at the same angle of the uptrend or downtrend, we will have created a channel. No, we’re not talking about ESPN, ABC, or Cartoon Network.
Still, this doesn’t mean that you should walk away like it’s a commercial break- channels can be just as exciting to watch as America’s Next Top Model or Entourage!
Channels are just another tool in technical analysis which can be used to determine good places to buy or sell. Both the tops and bottoms of channels represent potential areas of support or resistance.
To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to position where it touches the most recent peak. This should be done at the same time you create the trend line.
To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.
When prices hit the bottom trend line, this may be used as a buying area. When prices hit the upper trend line, this may be used as a selling area.
Types of channels
There are three types of channels:
Ascending channel (higher highs and higher lows)
Descending channel (lower highs and lower lows)
Horizontal channel (ranging)
Important things to remember about drawing trend lines:
When constructing a channel, both trend lines must be parallel to each other.
Generally, the bottom of channel is considered a buy zone while the top of channel is considered a sell zone.
Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw! A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at another is not correct and could lead to bad trades.