Trend lines may be the most common form of technical analysis in foreign exchange trading, and they may also be the most underutilized.
If drawn correctly, they can be as accurate as any other method. Unfortunately, most forex traders do not draw this line correctly, or try to make this line match the market, not the other way around.
The foreign exchange trend line is the line that defines the market trend over a period of time, and is the most intuitive performance to judge the market trend. To understand the trend line, we must first understand the market trend.
Distinguish from the trend direction: The exchange rate fluctuations in the foreign exchange market mainly include three main situations: rising, falling, and flat. Correspondingly, the trend of the foreign exchange market is also divided into:
Rising trend: The exchange rate rises, which means that the buyer’s power overwhelms the seller and has the upper hand;
Downward trend: The exchange rate repeats up and down in a certain range, indicating that the purchasing power is roughly equal to the selling pressure; horizontal trend: The exchange rate falls, indicating that the selling pressure is greater than the purchasing power.
Forex trading graph up and down trend
In their most basic form, an upward trend line is drawn along the bottom of an easily identifiable support area (trough).
In a downtrend, the trend line is drawn along the top of an easily identifiable resistance area (wave crest).
How to draw a trend line?
In order to draw a foreign exchange trend line correctly, all you have to do is to find the two main tops or bottoms and connect them.
Three types of foreign exchange trend lines
Uptrend (higher lows)
Downtrend (lower highs)
Horizontal trend (oscillation)
Here are some important things to keep in mind when using trend lines in forex trading:
At least two tops or two bottoms are required to draw an effective trend line, but three tops or two bottoms are required to determine a trend line.
The steeper the trend line you draw, the less reliable it is and the more likely it is to collapse.
Just like horizontal support and resistance levels, the more the trend line is tested, the stronger it becomes.
Most importantly, never draw a trend line by forcing them to adapt to the market. If they are inappropriate, then the trend line is not valid!
Trend line trading
The foreign exchange trend line helps us distinguish the direction of the trend and avoid contrarian operations. “Follow the trend” is a profitable friend. If you want to make a profit, please follow the trend first.
In theory, two points can form a line, but why are many people’s charts full of trend lines, but they are rarely effective?
To find an effective trend line, we must be more cautious in identifying:
- An effective trend line must be the connection between the crest and the crest or the connection between the trough and the trough.
- An effective trend line must have more than three points connected before it can be established.
- The more points connected by the trend line, the greater the meaning of support or pressure it represents.
- The momentary piercing of the effective trend line by the shadow line does not mean an effective breakthrough. When it is pierced at the close, the meaning of an effective breakthrough is clear.
- The longer a valid trend line is formed, the more meaningful it represents. That is to say, the trend line formed in a few years is definitely greater than the trend line formed in only a few weeks.
- After the trend line is effectively broken, the roles of the original support pressure are often interchanged, the original support becomes pressure, and the original pressure becomes support.