Trendlines In Forex - Explanation And How To Draw Trendlines
Trendlines form part of the core set of tools used by Forex traders who implement technical analysis. If you want to understand this concept better, then fate has lead you to the right place.
Trendline– A line drawn on a price chart that connects swing highs or swing lows. Trendlines act as support and resistance just as normal horizontal levels do.
What are the differences between trendlines when compared to horizontal support and resistance levels?
1. Diagonal support and resistance- Trendlines do not occur at certain price levels, therefore they are not horizontal. Instead, they are drawn diagonally by connecting swing points.
2. Act as dynamic support and resistance- As a technical analysis tool, trendlines take time into account. Consequently, they are viewed as dynamic support and resistance because both price and time are factors.
3. Show trend direction- The slope of a trendline shows the prevailing direction of the trend. Ascending trendlines depict an uptrend while descending trendlines tell us we are in a downtrend.
How to draw trendlines?
Drawing this on your chart is as easy as it gets, connect two swing points on the chart and you are done
Now that we have defined trendlines and how to draw them, it is time to take a look at where they matter…on the chart.
Uptrend example- GBPUSD H4
Downtrend example- EURUSD H1
Although it’s dead easy to draw trendlines, if you want to use them effectively and make money then there are more essential guidelines to follow. Don’t worry here they come…
Using trendlines correctly
- Price should make a new high (in an uptrend) or low (in a downtrend) to confirm the anchors of the trendline as valid swing points. Without this, the trendline is invalid and should not be used. Now we are back to the charts; look at our previous examples where the market made a new high or low, thus confirming the trendline is valid, vs the examples where price failed to make a new high or low, meaning the trendline should not be considered.
Previous uptrend example- GBPUSD H4
As shown on the chart price exceeds the previous high and makes a new higher high, confirming the trendline. Compare that to the following.
Here it is clear that the market never exceeds past the current high, therefore the trendline is invalid and should not influence trading decisions.
Previous downtrend example- EURUSD H1
The market moves below the previous low, which means the trendline is valid. Take a look at the next chart to see an invalid descending trendline example.
Price does not fall below the current low i.e. the trendline is not valid and should be removed from the analysis.
- The more swing points connected the stronger the trendline. 2 swing points are enough for analysis. However, 3 touches or more is best to trade trendlines effectively, this can also be achieved with channels which will be discussed in another article. Like in the example below, multiple swing points mean a trendline is more likely to hold
- Trendlines of higher timeframes are stronger vs those on a lower timeframe. It is possible to have multiple trendlines on the same chart and they can contradict one another. However the higher timeframe has more relevance and power behind it, you should position yourself and adjust based on the longer timeframe as trendlines drawn on the lower timeframes are usually corrections against the prevailing market direction.
- Technical analysis is subjective, thus trendlines can be interpreted differently by traders. One trader may use the high/ low prices as swing points, another may use closing prices only and some might mix high/ low prices with closing prices. Similar to horizontal levels, trendlines are not exact so they too should be treated as zones of support and resistance. This is why there are varying approaches to this technical analysis approach and finding the right method for you takes some experience. Below is a chart showing how trendlines can be drawn through wicks and take closing prices into account.
In this article we- Defined trendlines, how they can be drawn and the important points to consider about this form of technical analysis. Trendlines are an excellent tool to use in a variety of approaches such as trend trading, breakout trading and pattern trading.
You have taken a great step by reading this article and gaining an understanding of this powerful technique. But that is just the start. Now it is up to you to test and find how, and if, trendlines can benefit your trading.
Until next time, keep calm and trade along.