Trading Using Trend Lines

Trend lines are one of the most basic ideas in any type of trading.  Forex is a great example of where you can see that the market moves in trends, consistent movement in one direction, then a pullback and consistent movement in the other direction. Trend lines will show you three specific pieces of information that can be used either separately or together.  Together they can help you form a trading strategy based on the information they provide. 

Trendlines will tell you the direction of the current price action, the strength or speed of that action and if there is likely to be support or resistance to this movement in the future.  Looking at each of these indicators alone can be helpful, and when you study all of them together you can base your trading plans on them.

Trendlines can be extremely useful in successful Forex trading.  It’s very important that before you use trend lines and focus your trading strategy on them that you make sure to understand fully what you are looking at.  It is possible to fall into some pretty significant traps if you follow trend lines and do not quite understand them.  Trendlines are not used as often as they can be.  They can be a great tool for technical analysis but they must be accurate to be helpful.  If a trader doesn’t draw the trendline correctly, it can be less helpful than not looking at the trend at all.

To draw a trendline, you need to connect the major highs and lows.  To confirm a trendline, you need to have three tops or bottoms.  To draw it in the first place you need at least two.  Like any other indicator, the more you test a trendline, the more reliable it is.  The steeper the trendline, the less reliable it is. 

Trendlines are an effective tool for analyzing the market.  They can indicate to a trader when a period of pullback, movement against the trend, is over.  Tradelines can also alert you to the acceleration or reversing of a trend.  Trendlines must not be used on their own.  It is imperative that you follow the pricing in addition to the trend lines.  Do not lose sight of the true way to determine your profit or loss, the price action.

If you fully understand the way price action and trends work, then trend lines become the helpful tool they can be. Prices are constantly changing.  Traders sometimes buy at the top of a price wave or sell instead of buying as the trend starts to rise.  Some of these errors might be due to the complexity of the charts one is working with. Trendlines can be used to simplify the charting or cut out some of the constant activity and allow a trader to look at just what is important to his strategy.

When a trader correctly draws the trend lines, they might be able to tune out some of the other activity on the charts and get a clearer picture of what they are looking at allowing you to see what is really happening in the bigger picture.  This is where trend lines can be most helpful.