How to trade using trend lines

Where to draw trend lines

If we look at our forex charts, we normally see sections where the price moves in long clear trends. They then slow down and start moving back and forth, forming what looks like a series of zigzags before again moving in a clear trend.

Sections where the trend seems to have run out of momentum are referred to as consolidations. In the image above these have been marked with red circles.

It is at these consolidations where it’s ideal to draw your trend lines.

How to draw trend lines

Trend lines are best drawn to touch the first two points that form a series of lows or highs in a consolidation. The sooner the trend line is drawn, the more the trading opportunities would be available.

The above trend line has been plotted with points 1 and 2 and a virtual point 3 is expected in the near future. Since the price bounced or reversed on the trend line at points 1 and 2, we would expect the price to do the same the next time it touches the trend line. So basically we would buy in this case at point 3.

In this case we will have anticipated and traded a reversal at point 3.

Drawing multiple trend lines

It’s very okay to draw more than one trend line in one setup. Two trend lines can be drawn on top and below a consolidation to form a structure as above. In this setup more trading opportunities can appear compared to only having one trend line.

Trading trend line breakouts

In the first examples, we have been focusing on trading reversals. This is where the trader anticipates the price to reverse or “bounce” on touching a trend line. In some cases the price might cut right through a trend line after several bounces. This is what is referred to as a breakout.

If the price breaks out, but then goes back and touches the trend line from the opposite side, then continues in the direction of the breakout, the price is said to have retested the trend line.

Breakouts are normally traded after retests. Contrary to reversals, the trade should normally be in the direction of the breakout.

Breakouts are usually places where we expect the price to come out of a consolidation with regained momentum. This is popularly referred to as continuation of the trend that was there before the consolidation.

False breakouts

Sometimes the price might seem to have broken out through a trend line, but then it goes right back to its previous trend. This kind of breakouts are called false breakouts or fakeouts. Several false breakouts may go ahead and form a new trend. As represented in the image above with the red trend line.

If more than one false breakouts appear on a trend line, then it may be time to abandon that trend line and draw a new one using the points formed by the false breakouts.

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