Principles of How Do You Draw Trendlines?
To draw trend line traders should use candlesticks charts
- The points that are used to plot the trendlines are points that are along the lows of the price bars in an upwards moving market. An upward trend move is defined by higher highs and higher lows on the price chart.
- The points that are used to plot the trendlines are along the highs of the price bars in a downward moving market. A downwards trend move is defined by lower highs & lower lows on the price chart.
- The points that are used to draw trendlines are extremes points - the high or the low price. These price extremes are critical because a price close beyond these extreme price points is interpreted as a signal that the market trend direction may be changing. This is analyzed as entry signal or an exit signal.
- The more often a trend line is tested (touched) by the price but it isn't broken, then the more powerful the signal of this trend line.
There are two main technical analysis techniques of trading this trendline setup:
- The Trend-Line Bounce
- The Trend Line Break
Analysis Methods of Trend-Lines
Forex Trend Line Bounce
The trend line bounce is interpreted as a trend continuation signal. Forex trendline bounce is when the price bounces off the trendline to continue moving in the same direction of the trend line.
- In an upward trend - the price will bounce upwards after hitting this up-wards trendline level which is the area of price support region.
- In a downwards trend - the price will bounce downwards after hitting this downward trend-line level which is the area of price resistance region.
Forex Trend Line Break
The trendline break - the trendline break is a reversal signal where the price goes through the trend line and starts moving in the opposite direction to that of the trend.
When a upwards trendline is broken - the market sentiment reverses & becomes bearish
When a downwards trend is broken - the market sentiment reverses and becomes bullish.
For very strong trends, after a trendline break signal, the price will consolidate for some time before moving in the opposite direction. For short term trends then this trend line break reversal signal will mean price may reverse immediately after this trendline break signal.
Forex trend line bounce and trend line break are used in technical analysis based on technical analysis theory that these trend line levels represent support and resistance levels for the price movement.
Entry, Exit & Setting stops:
Forex trend line method is used to determine entry and exit points for trades, protective stop losses are placed just above or below these trend lines after trades are opened using trend line technical analysis methods.
The trend line bounce signal is a low risk entry method used by traders to place entry trades after price has retraced and is now bounced of a trend line and is now moving in direction of the trend. Forex trades are opened along these trendline levels & a stop loss orders placed just above or below these trendlines.
The trend line break signal is an indicator of possible trend reversal. When a trendline is broken the price will begin going in the opposite direction. This trend line break signal generates an early exit signal for traders to exit their open trades and take profit for these trades. When there a penetration of these trend line levels - trendline break - this is a signal that the price can start moving in the opposite direction to that of the current trend.
Unlike other technical analysis indicators there is no formula used to calculate trend lines, this trendline formation is drawn between two chart points on the price chart.
Principles of How Do You Draw Trend Lines? - How Do I Analyze Trend Line Bounce?
