Trend lines in Forex are the most basic tool in the technical trader’s tool. It is easy to understand how they work and you can use a trend line with any other technical tool in trading.
Are you a beginner in Forex or you are experienced trader it is good to know these facts about trend lines.
What is a Trend Line in Forex
A trend line in Forex is one of the most used technical basic tools in Forex where you can use it at any time frame you wish. Same rules are used on any time frame and when used correctly they can be very helpful in determining where to position a trade entry and trade exit.
Trend line is a level which represents support or resistance depending on the direction of the trend. They can help you to identify where there is potential supply and demand, which means you can place sell or buy orders.
Trend lines are sometimes used in the wrong way when the trader does not understand principles behind the trend line and you get a bunch of lines on the chart. Messy charts cannot give you a clear view and direction where to position your trade entry or trade exit.
I will show you:
- what a trend line is
- how to use trend line in Forex trading
In a post about support and resistance I have shown you what those lines represent and when you draw support and resistance lines as angled lines you get a trend line. Support and resistance lines show potential buying or selling pressure. In a post about Metatrader 4 I have shown you where the trend line is located.
When you have a trend line it is the same. Trend line shows places where buyers or sellers are waiting to exit or to enter with a trade. It also shows you:
- trend direction
- potential market swing points
- clear potential movement and trading without indicators
If the trend line is touched several times over a longer period of time it means that it becomes more important.
When the market is in an uptrend we expect to have a longer impulsive move than the corrective decline against the trend. This behavior tells us that the demand is still high and the trend is strong.
When buyers become weaker we see impulse moves shorter and the correction move increase in size.
Example of a Down Trend Line in Forex
When you have downtrend you draw an angled line that connects highs. Connecting highs you are connecting potential selling areas because on those places traders like to put their orders hoping it will bounce and continue in the previous direction.
Downtrend represents selling pressure on the market and you should watch where to open sell order instead buy order. It also represents resistance every time it is tested by future price. If the time frame is higher the stronger resistance is and it will be very hard to break.
Example of an Uptrend Line in Forex
When you have an uptrend you draw an angled line that connects lows. Connecting lows you are connecting potential buying areas because on those places traders like to put their orders hoping it will bounce and continue in the previous direction .
Uptrend represents buying pressure on the market and you should watch where to open buy order instead sell order. It also represents support every time it is tested by future price. If the time frame is higher the stronger support is and it will be very hard to break.
How to Define Trend With the Trend Line
When you draw a trend line on the chart you will see where it is pointing. Does the trend line have a descending slope or ascending slope.
If the trend line is pointing lower it means the market is in downtrend.
If the trend line is pointing higher it means the market is in uptrend.
If you see a trend line is changing slope and becomes flat and starts to move sidesway that means the trend is moving into range. It can take a while until the market moves from range and continues in trend direction or it changes trend.
If the trend line is getting steeper it means the trend is stronger. But have in mind that a market with a steeper trend line could go into buying climax where it can reverse because it is overbought or oversold.
When you see that the trend is going into range or becomes steeper you can adjust your trading decision by going into trade when the trend continues or to exit from a trade when going into range.
How to Trade Uptrend and Downtrend in Forex
You can trade trend lines with good results by following certain rules. Those are that you need to buy or sell near support/resistance with trend line and with price pattern.
On the image below you can see one setup that is really profitable. It has a downtrend line with the current resistance line that was previously the support line. Additionally to this there is a bearish Pinbar setup that confirms that the market will move down.
When to enter into trade in this setup?
The best is to open a sell order with Stop Loss above pin bar nose. If you want you can wait until the market moves 50% back on the pin bar and then enter. This way you are minimizing the stop loss pip number if the market does not move into your direction.
Another way of trading trend line in Forex is breakout or retest which I have explained in a post about support and resistance trading line.
The trend is your friend and you should buy bullish and bearish trend lines. This means that you should look to buy at the bullish support line and sell at the bearish resistance line.
In the image above you can see possible trade for sell on the bearish resistance trend line.
Why should you trade with the trend:
- There is more traders incline to open trade with the trend
- More probability that price will follow trend and you will be profitable
- Support or resistance levels around trend line are stronger when traded with trend direction
Here is short overview to take it with you what you have learn in this post:
- Trend lines in Forex are drawn at an angle
- In an uptrend trend line is drawn below the price
- In an downtrend trend line is drawn above the price
- trend line can be used as support or resistance line where you can enter trade when price reach those levels
- the more obvious the trend line is the better results will be
Trend lines in Forex are great tools to help you identify possible target levels where price could go or where it could bounce.
To be profitable in Forex you must be patient and wait until a good setup arises on the chart. If you are patient you can expect your trades will be more profitable.