The technical analysis of trend lines in forex trading

  • By Learn CFDs

  • September 7, 2018
  • 7:47 pm BST

Trendlines are used to define an uptrend or downtrend in the analysis of forex price action charts. This method is used as an integral piece of forex trading advice when recognizing patterns in the market. An uptrend is marked by a straight line following lows (or troughs) as they ascend higher. Alternatively, a downtrend is marked by a straight line following highs as they descend lower.

These lines are created by connecting the highs or lows of each candlestick in the pattern. Therefore, these trendlines are also known as support lines in a trend, showing the direction and limits of the trend. The aim of trend analysis is to recognize potential in price action and enter or exit trades accordingly. Here is a look at the basic concept of trend lines in technical analysis.

The two keys to trend lines and channels

The first rule to analyzing a trendline is that opportunities present themselves as either a descending price moving toward an uptrend or when rising prices head toward a downtrend. This allows for positions in the direction of the trendline. In this case, the trendline acts as a support line to the price’s uptrend. The time to buy is usually recommended as the price reaches this line. This only applies if the line is not penetrated, as that would indicate a break in the support and the end of the trend.

The second key is that a sell signal can be found when an uptrend line is broken, and a buy signal occurs when a downtrend line is broken. A standard minimum percentage price move beyond the line is applied as an indicator. These downtrends take the role of a resistance line. As long as the line is not broken, a price approaching this line can indicate a sell signal. A lower buying level is suggested for an uptrend, while higher sell levels are used in the downtrend.

Because the downtrend acts as a resistance line, sell points should be indicated as a collection of price action below the line. If it were above the line, it would mean a break in the line, deterring entry. A quality trend is seen when the price action follows the downtrend and ends with a break and a subsequent temporary spike. If a trend does not follow through, it may not always be wise to act on the direction of price movement as it reflects a false trend. It is possible, however, to note these risks in time and avoid danger.

Tracking changes in the trendline: redrawing

As with most trading strategies, a trend should be reassessed following changes. It may be necessary to redraw a trendline if the speed of the trend changes. This can be indicated by any movement outside the trend, especially if the price action breaks the trend temporarily and then continues again. This is particularly important as it could reflect instability in the trend.

A break in a trendline often reflects a change in the direction of the trend. However, when it is a false breach and the movement returns to the trend, the line will need to be redrawn. This ensures the trendline is actually accurate and can work in theory as well as practice. It is therefore essential to reassess the trend following any unstable movement.

Analyzing these trendlines proves essential for entry and exit strategies in the forex industry. By making use of the data in a chart, you can plan your actions around this movement and make wiser moves. This ultimately results in a better potential for gains and a reduced chance of losses. As with all strategies, this method should be used in conjunction with other forms of technical analysis for the best results.