One of the big things that traders talk about is trends; trends continuing, trends ending, trends changing, primary trend secondary trend, higher time frame trend, lower time-frame trend, the list goes on. With all this talk of trends many new traders can feel a little overwhelmed if they can’t identify the trend when they look at the chart so it’s important to always get a solid grip on some of the basic technical analysis tools that can help you to quickly assess a) if there is a trend and b) in which direction is it headed.

So with that in mind, we’re going to look at the best tool for this: the trend line. We’re going to recap all you need to know about trend lines; what is a trend line? how to draw a trend line?


What Is A Trend line?

A bullish trend line is a rising diagonal line applied to a chart joining significant lows where price is moving from the bottom left hand corner of the chart to the upper right hand corner.

GBPAUD

A bearish trend line then is the opposite; a declining diagonal line joining significant highs where price is moving from the top left hand corner of the chart to the bottom right hand corner.

GBPUSD

As you can see applying these lines to the chart clearly frames the direction that price is moving in and indicates in which direction you should be looking to trade. Remember, that trading with the trend works out to be far more profitable in the long-term than trading against the trend.

How To Draw A Trend line?


Drawing a trend line is the really important part of this puzzle. It’s fantastic to see a chart with a a nice trend line on but you need to be able to draw a trend line yourself.

We go into detail about how to do this in our Forex Trading Course but the two key points are that the trendline must contain the price action and so must run along the outer-edges of price and not pass through any previous price action.

GBPAUD

GBPAUD

The reason for this is that we always want out trend lines to be as up-to-date as possible and so we need to make sure that our line is fitted to the most recent swings. Of course to begin with the “wrong” trend line was “right” all the way up until it was broken and price moved through it, so we then update our trend line by fitting the line to the new swing point .

So now we know how to draw a trend line we need to think about them in just a little more depth. If we are looking at a bearish trend line on the 60min chart and looking to set short trades, but the daily trend is clearly bullish, we can quickly run into problems so we need to look at how to identify trend lines from the higher time frame down and how to use them.

Let’s look at an example.

GBPAUD

We can see in the first image that the Daily trend is clearly bullish as shown by the strong bullish trendline. Within this Daily trend however, we do have bearish swings in price which on the lower time-frame manifest as bearish trend lines.

On this H4 chart we can clearly see that we have a nice bearish trend in play with a great bearish trend line highlighting this.

GBPAUD

We can see it even clearer on the H1 charts.

GBPAUD

So we have a Daily bullish trend and a lower time frame bearish trend. How do we use this information?

Well, we have a few options.

Firstly we could look to only take trades with the Daily trend and so ignore any counter trend swings in price until they come and retest the trend line where we could look to trade.

Or we could accept that within a Daily trend we do get these counter trend periods which can last from a couple of weeks to a couple of months and so look to take advantage of clear opportunities on the lower time-frame. If we do this we can also decide that we will trade the lower time-frame trend until it comes to meet the Daily trend at which point we give seniority to the Daily trend and cease lower time-frame trading.

GBPAUD

This can work well and we can also be on the look out for a failure of a lower time-frame trendline which can be a great clue that the correction to the main trend is over or ending.

In the image below we can see we have our Daily trend line in place indicating a Bullish trend, we also have our lower time-frame trendline drawn on. We can see that price broke higher through the lower time-frame trendline signalling that the Daily bullish trend was back in play, we then re-tested the trend line before taking off higher. These situations create fantastic trading opportunities and are a look at a more advanced way of using trend lines.
GBPAUD


All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.

Education feed

Editors’ Picks

EUR/USD nears 1.1100 ahead of the close

The EUR/USD pair is at daily lows after US and Chinese authorities confirmed phase one on a trade deal agreed. Some tariffs will be rolled back as China agreed on “massive purchases” of US goods, according to President Trump.

EUR/USD News

GBP/USD extends corrective decline to 1.3330 region

The GBP/USD pair continues shedding part of its post-UK election’s gains, although at levels last seen several months ago. Hopes that PM Johnson will pass his Brexit deal through Parliament will keep the Sterling on the winning side.

GBP/USD News

USD/JPY: Bulls gearing up for a move beyond 110.00 handle

USD/JPY added to the overnight strong gains amid US-China trade optimism. The UK election results further boosted the global risk sentiment on Friday. Investors now look forward to the US retail sales data for a fresh impetus.

USD/JPY News

Editors’ Picks

EUR/USD nears 1.1100 ahead of the close

The EUR/USD pair is at daily lows after US and Chinese authorities confirmed phase one on a trade deal agreed. Some tariffs will be rolled back as China agreed on “massive purchases” of US goods, according to President Trump.

EUR/USD News

GBP/USD extends corrective decline to 1.3330 region

The GBP/USD pair continues shedding part of its post-UK election’s gains, although at levels last seen several months ago. Hopes that PM Johnson will pass his Brexit deal through Parliament will keep the Sterling on the winning side.

GBP/USD News

USD/JPY: Bulls gearing up for a move beyond 110.00 handle

USD/JPY added to the overnight strong gains amid US-China trade optimism. The UK election results further boosted the global risk sentiment on Friday. Investors now look forward to the US retail sales data for a fresh impetus.

USD/JPY News

Financial Big Brother is coming, but Bitcoin will remain

Central banks move quickly looking to oversight all payments. Greece could impose sanctions if digital means are not used in at least 30% of payments. Once inside the crypto ecosystem, governments have little capacity for financial censorship.

Read more

Gold: Steadily climbs to session tops, upside seems limited

Gold extended the overnight rejection slide from 100-day SMA resistance and witnessed some follow-through selling during the Asian session on Friday.

Gold News

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology