How To Draw The Best Trend Lines

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The Complete Guide How To Draw and Use Trend Lines Perfectly [9332]

How To Draw and Use Trendlines – Trend lines have become widely popular as a way to identify possible support or resistance. But one question still lingers among Forex traders – how to draw trend lines perfectly?

Trendlines are very useful in helping you determine the trend, and also the strength of that trend as well. Today we are going to take a closer look at this important price action analysis technique.

As the name implies, trend lines are levels used in technical analysis that can be drawn along a trend to represent either support or resistance, depending on the direction of the trend.

Think of them as the diagonal equivalent of horizontal support and resistance.

Trendlines are a great place to start. All you have to do is identify trends on a chart, draw your trendlines and then watch how the price interacts with them.

These trend lines can help us to identify potential areas of increased supply and demand, which can cause the market to move down or up respectively.

In this article we will look at:

  • How to draw trendlines
  • How to use trendlines in your trading

To draw forex trend lines perfectly, all you have to do is locate two major tops or bottoms and connect them.

Yep, it’s that simple.

Let’s take a look at a trend line that was drawn during an uptrend.

Notice how in the chart above, the market touched off of trend line support several times over an extended period of time.

In this manner, the price of the pair records higher bottoms and higher tops.

This trend line represented an area of support where traders can begin to look for buying opportunities.

Now let’s take a look at a trend line that was drawn during a downtrend.

Notice how in the chart above, the market touched off of trend line resistance several times over an extended period of time.

In this manner, the price of the pair records lower bottoms and lower tops.

This trend line represented an area of resistance where traders can begin to look for selling opportunities.

Let’s Draw Trendlines

In order to draw a trendline (bearish or bullish), you first need to identify a trend. So, let’s have a look at a chart.

Can you find a trend in the chart above?

It’s hard to do so visually without the help of a trendline. But once we add our trendline to the chart, you can see that there are at least six minor trends here.

The very first thing to know about drawing trend lines is that you need at least two points in the market to start a trend line. Once the second swing high or low has been identified, you can draw your trend line.

Let’s look below.

Notice in the chart above, we have two main points at which we can start to draw our trend line. Once this level has been established, we can start to look for bearish or bullish price action to join the rally.

The question is whether you should use the candle-wicks or the candle-bodies to draw the trendlines!?

The answer is CONFLUENCE.

NOTE : Never think of the trend as contained within of a single line. The trend is not a line, but an area.

Whenever you get the best and the most contact points and confluence around your trendline, that’s how you draw it.

There are no fixed rules about whether wicks or bodies are better.

Just look for a trendline that gives you the most confirmation without beeing violated too much. Having said that, I don’t mind violations of just candle wicks as much as of candle bodies.

Now I will show you how to spot and trade corrections of trending moves.

However, I would like to emphasize that counter-trend trading is for advanced traders. The reason for this is that it is a risky initiative to trade corrections.

We can get the following information from trendlines:

  • Is a trend losing or gaining strength? (The trendline angle tells us that)
  • Trendlines can be support and resistance
  • A break of a trendline after a trending period can be a meaningful signal

One thing to note about using trend lines in this way is that it works best when you have a really clean trend line with three or more touches.

The more obvious the trend line is, the better this strategy will work.

Let’s look below.

Notice how shortly after breaking trend line resistance, the market came back to retest the trend line as new support and formed a bullish pin bar in the process.

This gave price action traders an opportunity to buy.

This is a great way to use trend lines to spot potential reversals in the market. It is without a doubt one of the best ways to catch a big move as a market changes direction.

The Complete Guide On How To Use Trendlines

The Complete Guide On How To Use Trendlines

Trendlines are one of my favorite trading tools because they allow us to explore market psychology and trends in many different ways and they are also universally applicable across timeframes, markets and market conditions.

In this article, I will give you a complete introduction to trendlines and how to use them in your trading.

How to draw and use trendlines 101

Generally speaking, it is advisable to wait for three confirmed points of contact before you start putting further attention to a trendline. Most traders make the mistake and connect the first two highs or lows and then get overly excited once the price gets there again. However, a trendline is only confirmed if you can get three points of contact because you can always connect any two random points on your charts. But when three points of contact are lining up, it is no coincidence anymore.

The next question that always comes up is whether you should use the candlestick-wicks or the candle-bodies to draw the trendlines!? The answer is confluence.

Whenever you get the best and the most contact points and confluence around your trendline, that’s how you draw it. There are no fixed rules about whether wicks or bodies are better. Just look for a trendline that gives you the most confirmation without beeing violated too much.

At the same time, consistency is very important as well. You should define for yourself how you draw trendlines and then always stick to that approach to avoid noise.

Below you see a screenshot with 2 possible trendlines and multiple touches each. After the third touch, the trendlines have been confirmed and you can see how I use both the wicks and the bodies to get the trendline in.

Upper and lower trendlines

The next question that comes up is whether you draw trendlines connecting the lows or the highs. The answer is very straight forward:

During a downtrend, I use the highs and during an uptrend, I use the lows to draw a trendline. This has two benefits: You can use the touches to get into trend-following trades and when the trendline breaks we can use that to trade reversals.

click to enlarge

В

The slope and angles: trend strength

The slope – or the angle – of trendlines immediately tells you how strong a trend is.

A large angle on a lower trendline in an uptrend means that the lows are rising significantly fast and that the momentum is high. The screenshot below shows an uptrend with steadily increasing angles of trendlines. The trend is gaining momentum and the trendlines visualize it perfectly.

Some people will call this the bump and thrust pattern when you see that a trend is suddenly gaining even more strength and then the trend becomes unsustainable at one point.

click to enlarge

The next screenshot shows the opposite: a downtrend with multiple trendlines that show decreasing angles. Obviously, the trend is losing momentum.

click to enlarge

Reading trend structure

The screenshot below shows a primary downtrend as indicated by the red arrow.

During the primary trend, one can start looking for weak consolidation phases and apply trendlines to those price movements. The low angle of the trendlines indicates that the consolidation does not have a high chance of turning into a real bullish reversal. The sellers still keep pushing the price very close to the bottom of the move, the higher lows are very shallow and the buyers cannot take over the price action. One then just has to wait until the trendline is broken and the downtrend is resumed.

Of course, you won’t always be able to draw a trendline, but if you can find one, they can be high probability trade setups.

Trendline patterns: Wedge

There are a few patterns in technical analysis that are based on the principles of trendlines.В The Wedge is a very popular one and we can apply our knowledge here nicely.

In the scenario below, the lower trendline indicates that the price is falling very slowly as the angle of the lower trendline is very shallow. This already shows that the sellers are not as strong in this market anymore.В In the end, before the strong reversal, the market makes one final push which ends as a fake breakout. This pattern is also referred to as a Bull / Bear trap.

The two trendlines are also converging which shows that the market is in a consolidation phase. The trend waves are becoming smaller and smaller and the whole market is slowing down. During a wedge pattern, it is best to stand aside and to not take any new positions. Once the trendline is broken to the upside, the wedge gets triggered and the bullish move, that was already indicated, can start.

Trendlines are also an essential part of both, our advanced price action course and the Heiken Ashi day trading system.

How To Draw Trend Lines Correctly

Trend lines are a great way to frame the market movement and often times they seem to act as support and resistance.

Keep in mind it is not the actual trend line that stops price but can pinpoint areas on the chart where trader may have an interest in taking a position.

You will often find that when you draw a trend line and price comes down to it, other price structures are also in the area (look left on the chart) that can add confluence to your trading setup.

It is very easy to be overly subjective when searching for trend lines so it is important that you determine your method to draw them and then to be consistent

Without being consistent, you will never know if you are taking full advantage of the potential of your trading system.

What Does a Correctly Drawn Trend Line Show You

When you draw a trend line, it can quickly give you 3 things that can aid you in your trading:

  1. Trend Direction
  2. Potential Market Swing Points
  3. Clarity Without Trading Indicators

Trend Direction

While some traders (most) will use moving averages to determine trend direction, a correctly drawn trend line will show you the overall direction of the market. When a trend line breaks, it can give you a “heads up” of a potential change in trend direction.

Potential Market Swing Points

Price moves in waves with peaks and troughs. Trend lines can highlight areas on your chart where the next turn in price can occur especially in the dominant trend direction.

Clarity

Far too many traders use too many trading indicator on their trading chart. They have duplicate information (some traders will use 2 or more momentum indicators for example) and all that does is lead to confusion and anlysis paralysis. Trend lines keep it simple and will not hide the most important part of any chart: price.

3 Steps To Drawing An Up Trend Line

An uptrend line indicates a market in an uptrend. That is unless you are using a trend line on a micro structure such as a pullback in price. Why do we draw the trend line?

There are two main purposes for me for drawing upward trend lines:

  1. To trade off the upward bounce of the upward trend line
  2. See if price intersects that upward trend line, it is a potential signal for a downtrend so if I have trade positions are currently in profit, I should be probably thinking of bailing out!

Referring to the chart above…

  1. Look for higher swing lows or call it “bottoms” of price if you may.
  2. For a market in an uptrend (like the chart above), trend lines must be drawn below the price connecting a minimum of 2 bottoms of increasing height. You need a minimum of 2 bottoms to draw a trend line.
  3. Make sure the bottoms are spaced apart nicely. If they are close together, it is generally not good to use. If they are too far apart, they would not be noticeable.

3 Steps To Drawing A Down Trend Line

  1. Look for lower swing highs or call it “peaks” of price if you may.
  2. For a downtrend market (like the chart below), trend lines must be drawn above the price connecting a minimum of 2 peaks of decreasing height. You need a minimum of 2 peaks to draw a trend line.
  3. Make sure the peaks are spaced apart nicely. If they are close together, it is generally not good to use. If they are too far apart, they would not be noticeable.

Tips For Drawing Trend Lines

A trend line is just a straight line on your chart. It has no magical properties but they do a great job of highlight price movement (rhythm).

Higher Time Frame

As with most price action and technical analysis methods, higher time frame trading charts seem to respond better. Lower time frame charts have a lot of “random movements” and just like a chart pattern trader, you want to look at meaningful price movements. What is more meaningful than something like a daily chart? It highlights the overall condition of that instrument without getting bogged down in every blip on the screen. You will also be able to better spot the long term trend.

Support Levels and Resistance Levels

As mentioned, trend lines do not contain price like a barrier. They do show the rhythm and momentum of the market (think of fanning trend lines) and many traders do use them. Are they a self fulfilling prophecy? I don’t know but they do seem to represent turning points and often line up with price structure which is as close to the market as you can really get.

Don’t Squint

When drawing a trend line, there is no true correct way. There are methods such as Demark Trend lines or using how Victor Sperandeo draws them but the key point is if the swings don’t pop out at you, you are just guessing. Best fit is a good motto to use.

Don’t Place Stops Directly Above Or Below

They are not a brick wall and many times price will flash below the trend line after you placed a trade. Since the common method of stop placement is right below the trend line (or horizontal support and resistance level), they are ripe for stop hunts as traders seek order flow. Use an ATR type of stop loss placement so you don’t get taken out when the masses do and let their re-entry propel your trade in your direction.

Use Trend Lines To Form A Price Channel

To frame price even better, consider drawing a trend line, copying it, and then placing it on the opposing side of price (highs or lows). Price generally channels, drives, channels, drives…and a trend line channel can help you visualize that type of price behavior.

How to Draw Levels, Trend Lines and Channels

Video Transcript:

Hello, traders. Welcome to the Advanced Technical Analysis Course on the first module, Technical Analysis 101. On this lesson, you will learn how to use and draw levels, trend lines and channels. We’re going to jump right into the N.T.4. platform because there’s no better way to show you these than actually doing it.

Okay, traders, we are back. Here, we have the G.B.P./U.S.D. daily chart and the first thing we need to go through is what levels are we going to be using. There are a lot of technical analysts out there that will tell you that you need to draw every single one of these quarter resistance levels on your charts. I’m here to tell you that this is wrong. You only need to draw the important levels on the daily and four-hour chart, because if you start drawing every single level from the 4-hour chart to the 15-minute chart, you will end up with a lot of lines on your chart and you will be unable to take a profitable trade and to let your profitable trade run.
I’m going to guide you step by step on what to do when you are in front of a naked chart just like this one. Remember here, we are just going to learn how to draw them and use them.

The first thing you need to do is go to the daily chart and look for the first high if you are in an uptrend or the first low if you are in a downtrend. Why are we looking for the first high and the first low? Because remember that in an uptrend, the supply areas get taken out, and in a downtrend, the demand areas get taken out. So we are going to draw levels that might get taken out and levels that might hold.

Here, we are in an uptrend. You can see here that this area right here is being tested very strongly. You can see that, here, we have a long, wicked candle that goes all the way up here. That’s a huge week, a 77 pip week. This means that this candle opened right here, price moved about 94 pips to the upside and then closed just 16 pips from the opening price. This gives us rejection, guys. You can correctly assess that here we have a strong resistance area, so you’re going to grab your horizontal line two and you’re going to draw a horizontal line right at the body of the candle.

We are going to use the bodies of the candles for our horizontal lines because the rejection or the week highs really don’t matter to us in support and resistance. They do matter once you take the trade because we are going to use them, the highs and the lows, as our stop loss levels but we are going to go through that on another lesson.

If we continue with price action, you can see that we do have some support and resistance levels but they are very mild because they get taken out very quickly. This is what I’m talking about, guys. You need overall levels. You need big levels. You need levels that have been tested countless times and levels that were tested at support and now being tested at resistance. This is not the case. You can see that we went all the way up here and this candle closed above our level of resistance but did not take this high. Just after this candle, we have a huge 140 pip candle to the downside. This is what we call a fake out.

Like here, right here, we have a long, wicked candle, 166 pip with a very small body that signals rejection. Right now, we are using this level of resistance as a trading level because we can short this currency pair with it.

Now we are not only going to use support and resistance levels to short. We are going to use trend lines. Because right now we are in an uptrend, we are going to go from this low to this low right here. Now this is how you draw a trend line. You can certainly draw… Let me figure this out for you guys because we are going to be looking on this very closely. We can certainly draw these trend lines from this week low through these weeks right here. As you can see, this trend line got taken out before moving up. This trend line is not valid anymore.

You need to focus on valid trend lines. Trend lines that have not been taken out just yet. Here, you can see that we have one, two, three, four weeks, five weeks with this 160 pip candle to the downside and this is a huge candle. You can see that the bearish pressure after this rejection is enormous. The candle did not break with the ascending trend line. Shorting at the end of this candle would be a terribly idea. Why? Because we are in ascending resistance. Remember that trend lines are just not lines that you draw on your chart, but they are ascending resistance and support.

What you need to wait is for a breakout, a retest of this ascending support as resistance. Right here when we test it, we have an entry to short the G.B.P/U.S.D.

This is basically how you use levels and trend lines to trade currency pairs. Of course you can use these methods… You can use these on any asset and you will use it on any asset that you are monitoring or that you want to trade. This is just basic support resistance and breakout strategy. When we have breakout, we have momentum, in this case, to the downside.

If you want to move things further you can see that we were actually in an ascending channel. You can clearly see that from this low, we retested these… What I did here, guys, is I just grabbed this trend line and made a parallel line to make it an ascending channel from this low. You can see that we clearly rejected it, tested it, which is now the top of the channel. Before coming up and before rejecting this area of resistance, the top of the channel and finally the breakout, the retest and the flush.

This trade would have yield at least 400 pips if you know how to hold onto your winners. Of course if you are one of these guys or if you listen to one of these analysts that draw support and resistance levels anywhere, you might just have gotten out 100 pips out of the move.

This is another thing. Here, you have to make sure to draw these level off support. Why this level of support? Because it’s the previous low that we made before rejecting this high. We can certainly assess that this is a range. The range is big enough to play this rejection, this breakout. As you can see here, when price comes all the way down to this resistance area at 5840, we have some Indecision Candles.

This is great because indecision candles not always mean that price is going to reverse. Sometimes Indecision Candles mean that price is going to continue, but we need a consolidation period, which is what is happening right now before moving lower or continuing with the flush in this case.

An idea here would have been to short right here at the retest of this ascending support as resistance and then take half of the position with 290 pip win. Move your stops here above this area of immediate support and let the rest run.

This is basically how you trade off levels. You just have to make sure to use the correct levels because if you were using these levels, for instance, as your first target, that would have been horrendous because this is not an actual level of… Well, it is a level of support but it’s not a strong level like the ones that I showed you. This is just the test back before the retracement and you see clearly that the first candle crosses below this low and we make new lows. The actual first target would have been here at this low and let the rest run. If you are okay with holding, you could have yield another 700 pips. Most of you guys would have been okay with a 290 pip win and I don’t blame you, because not too many traders can hold
trades for a week for a 300 pip win.

Basically this is how you use it. You just have to test and rinse and repeat and just draw your overall levels, your trend lines and trade breakouts with momentum.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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