Trendlines are one of the most important tool of forex analysis. Done right, they can tell you a lot about forex market trend. They can also help you to correctly distinguish between ranging and trending market. They will help you avoid trades against major trends or entering the trade just before major supports and resistance zones. Overall, trendlines drawing is a skill that can improve results from almost any forex strategy.
However, if not drawn properly, trendlines can give you false sense of security, which is always dangerous in forex.
What should you know about drawing trendlines
You need to find and connect at least two bottoms and two tops for one trendline. You may need another top or bottom for trendline confirmation. Sometimes, it is possible to use just one point to draw second paralell line for the trendline channel completion, if you already have first trendline.
If the trendline becomes to steep, it is unstable and unreliable. Do not rely on it for trend identification.
Trendlines grow stronger with growing number of tests. However, remember that they will not last forever.Do not expect to ride them till the end of days.
We do not enforce our trendlines in the forex chart. If they do not fit properly, maybe what we are looking for does not exist on the market. You always want to find trendlines that are best visible for most of the forex traders. easily recognisable trendlines are the best.
We draw trendlines connecting bottoms in the uptrend. This will create target support for next price reaction.
We draw trendlines connecting tops in the downtrend. This will create target ressistance for next price reaction.
Fractals and ZigZag forex indicators, can both help tremendously to identify swings low and high necessary to draw trendlines.
Imagine trendlines more like price zones, not exact price areas (very similar to supports and resistance in forex). Draw them using bodies of candles at tops and bottoms but also using average of price.
Trendlines are similar to horizontal supports and resistance zones.
By connecting tops in the downtrend we get upper channel line. This line serves great for entering the position in the direction of the trendline (downtrend). By connecting bottoms of our downtrend, we can get parralel line – lower border of the channel. This may serve as our profit target. Same applies for uptrend
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We can draw 3 main types of trendline channels:
Declining channel (downtrend channel) connceting lower tops and lower bottoms. We sell once price reaches upper trendline – border of the channel. Once the upper trendline is broken we may consider trend to be ended.
Rising channel (uptrend channel) connecting higher lows and higher bottoms. We buy once price reaches bottom trendline – border of the channel. Once the lower trendline is broken we may consider trend to be ended.
Horizontal channel (ranging market) is drawn by connecting horizontal tops (resistances) and horizontal bottoms (supports).