Today I will be discussing trend lines - an effective support and resistance tool that I keep a close eye on. Traders diligently monitor these levels, as they do with horizontal support and resistance levels.
Simple trend lines (also known as ‘diagonal support’ and ‘resistance levels’) offer very precise entries into the market, when used correctly. They can be used on any time-frame, however, as with any other technical tool, the higher the time-frame the more weight that is added.
When it comes to using trend lines, many traders tend to get confused by where to draw them. This is usually because they have been told there is a lot of ambiguity when deciding on what swing point to start drawing from.
As a trader you must remember to use things that standout on a chart. If it’s clear to you, it will be clear to everyone else (especially the larger flows i.e. the guys that move the market).
When it comes to drawing trend lines, I generally look for three things:
1) I want to find two clear points to draw from on the higher time-frame charts. The clearer these are, the better.
2) I consider whether I am looking to trade with the trend or looking at a potential trend reversal.
If price is shooting down the page and I have a clear trend line in place, I generally feel very confident looking for a trade when it comes back to that area. If, however, price has respected the trend line in the past and has now broken and closed on the other side of the trend line (blue circle on chart), I will look to play the back-end retest. This is where resistance becomes support.
3) I recognize that the more touches a trend line has, the weaker it could be.
This is where it can get confusing to a new trader. I have a rule that I look to trade the third touch on the trend line. I generally find these offer the highest probability. If the trend line is attracting lots of attention (in terms of price continuously bouncing off), I use the line as a reference point using confluence (more on this in future articles).
Number three is the most important when it comes to trend lines in my trading.
Conclusion
There are two ways I look to use a trend line. The first is either as support or resistance in the direction of the trend or for the retest once price actually breaks and closes on the other side. The second option is more in line with anticipating a trend reversal.
Both of these options can give very accurate entries into the market. The best advice I can give is to open up a blank chart and just start drawing lines. The more you do it the easier it will become.
At no time should anyone view the information presented anywhere on this website as advice, recommendation or proven. Everything reflected is merely opinion and may not be accurate. The purpose of the site is to express the opinions and views of Jarratt Davis. There is no intention to offer specific help, advice or suggestions to anyone reading any of the content posted here.
Editors’ Picks
AUD/USD remained bid above 0.6500
AUD/USD extended further its bullish performance, advancing for the fourth session in a row on Thursday, although a sustainable breakout of the key 200-day SMA at 0.6526 still remain elusive.
EUR/USD faces a minor resistance near at 1.0750
EUR/USD quickly left behind Wednesday’s small downtick and resumed its uptrend north of 1.0700 the figure, always on the back of the persistent sell-off in the US Dollar ahead of key PCE data on Friday.
Gold holds around $2,330 after dismal US data
Gold fell below $2,320 in the early American session as US yields shot higher after the data showed a significant increase in the US GDP price deflator in Q1. With safe-haven flows dominating the markets, however, XAU/USD reversed its direction and rose above $2,340.
Bitcoin price continues to get rejected from $65K resistance as SEC delays decision on spot BTC ETF options
Bitcoin (BTC) price has markets in disarray, provoking a broader market crash as it slumped to the $62,000 range on Thursday. Meanwhile, reverberations from spot BTC exchange-traded funds (ETFs) continue to influence the market.
US economy: slower growth with stronger inflation
The dollar strengthened, and stocks fell after statistical data from the US. The focus was on the preliminary estimate of GDP for the first quarter. Annualised quarterly growth came in at just 1.6%, down from the 2.5% and 3.4% previously forecast.
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