Line up for a discussion about trend-lines in Forex trading!
Trend-Lines, top lines, bottom lines, horizontal lines… a thin line, a thick line, we’re always looking for price to be in line or out of line for our next trade.
But, if you want to line your pockets from your Forex trading practice, you better understand 2 important things about trend-lines.
- You can draw the line but price doesn’t necessarily respect it.
- When price breaks through a support/resistance line or any other kind of trend-line, there is no guarantee it will keep on going.
Just as often, when price breaks through a trend-line, it immediately reverses and goes right back from whence it came.
That is to say, when price breaks a trend-line be quick to take the reversals if it immediately fails to hold the new position over the line.
Here are a few things trend-lines can do to make you chart smarter!
- Project the ascending top-line of a working trend.
- Track the high, low and middle of a working range.
- Identify important price levels that are being protected for periods of time.
- Create divergence giving a foreshadowing of reversals in price action.
- Identify pivotal points based on averages from the previous period, (day, week, month, etc).
- A line drawn at the level of a spike in price keeps track of outlier markers for future reference from random* flares in volatility.
- A line can help you see where the day’s trading took place — Near the highs, lows or right in the middle of the daily range.
The better you are at drawing trend-lines, the better you are at charting repeatable patterns and finding points of entry for your trades.
Here’s an example for you. In the chart below, note the following points.
- Horizontal lines capture the ebb and flow of regular price action over the course of several days on USD/JPY.
- The diagonal line keeps track of a top-line as price is falling.
- Note how price sometimes continues and sometimes reverses when it breaks through a line. Be ready for either!
- Anticipate the next move.
Yellow highlight shows examples where it broke the line and then reversed. Green checks identify breaking the line and continuing to the next line.
Current prices is at a level where it can either fall below the trend-in to the next anticipated support line, or continue up to the toppling. If it breaks the top-line and holds about it, all this horizontal lines which were drawn from past price action are future targets.
How do you draw trend-lines on a Forex chart?
There is a right and a wrong way to draw trend-lines on your chart, and it’s not what you think! I won’t give you that line about some holy grail or ancient hidden secrets… I will just show you the best way to draw trend-lines in our next blog post – read it here!