The financial markets often move in trends since demand and supply are not always in equilibrium.

Traders often try to use technical analysis techniques to determine the direction of the trend.

Trend lines are among the most important tools for technical analysis in forex trading, but at the same time, they are possibly one of the most underutilized tools.

If drawn in the right way, trend lines can be very useful in many trading methods, as they are one of the most versatile tools in trading.

But, unfortunately, most traders don’t draw their trend lines correctly and don’t know how to make use of them in their trading. Keep reading to learn about trend lines and how to use them.

What is the trend line?

Trend lines are lines used by traders and technical analysts to indicate the direction and slope of the market trend.

Where the slope is pointing — up or down — shows the direction of the trend, while the steepness of the slope indicates how fast the price is moving in the trend direction.

Obviously, trend lines are about the most common tools in any trading platform.

There are ordinary and angular trend lines, and they do more than just tell the direction and slope of the trend — a trend line can indicate where the price might end a pullback and turn to an impulse wave in the direction of the trend.

In essence, a trend line can serve as a support or resistance level — depending on the direction of the trend — but, unlike the normal support and resistance levels, which are horizontal, the trend line is sloping upward or downward, indicating the direction and speed of the price trend. 

In an uptrend, a typical trend line can act as a rising support level, where downward price swings (pullbacks) reverse to start new impulse waves to the upside, because of the huge buying pressure around the trend line.

The opposite can be said for a downtrend — the trend line acts as a descending resistance level where price rallies are turned back to start new impulse waves to the downside.

This happens because there is a huge selling pressure around the area of the trend line.

In theory, when the main trend line is broken, the trend is technically over, and the price is expected to reverse to the opposite direction.

But it’s not always like that in practice. Before we go into how to use the trend line in your trading, let’s explain how you should draw your trend lines.


How to draw a trend line correctly


Before you draw a trend line, you must identify the direction of the trend. Then you can apply the trend line at the appropriate price swing points.

You identify the direction of the trend by checking whether the price is making higher swing highs and lows — uptrend — or lower swing highs and lows — downtrend.

If the market is in an uptrend, you apply the trend line across the swing lows, which indicate where previous price corrections (pullbacks) ended.

For a market that is in a downtrend, you apply it across the swing highs since they indicate where prior pullbacks ended.

Here are the rules to follow when drawing a trend line:

-Draw the trend line across the first two swing points

-Consider only the major swing points, so if the second swing will create a very steep slope, you should ignore it and use the next one

-Adjust the trend line until it touches the most number of swing points — the line must not necessarily cross the high/low of the candlestick shadows at the swing points; it can divide the shadows or even the real bodies of the candlesticks at the swing points

It is not uncommon for the price to make a deeper pullback beyond your trend line and create a new, less-sloppy trend after breaking the first trend line — you may adjust your line accordingly.

Conversely, the price can also speed away from the main trend line and create a steeper trend — in which case you need to apply a new trend line that reflects the new slope.


Trading with trend lines


It is not enough to use the trend just to identify the trend direction and how fast the trend is moving.

You can use the trend line to determine when to enter a trade and how to manage the trade.

There are different ways to use the trend line in trading, but it all depends on your approach and the condition of the market. 

You can use the trend line to do the following:

-Anticipate where a pullback might reverse

-Estimate when a new impulse wave has taken off

-Establish potential profit targets

-Trail your profit and ride the trend

-Determine when a trend reversed


Pullback reversal at a trend line


The price usually moves in swings (waves) — upswings and downswings — and if the price is in a trend, the waves can be impulse waves and corrective waves (pullbacks).

In an uptrend, the upswings would be the impulse waves, which are usually longer and more powerful, while the downswings would be the pullbacks — which are shorter and weaker.

On the other hand, in a downtrend, the downswings, which are strong price moves in the trend direction, would be the impulse waves, while the upswings or rallies, which move against the trend, would be the pullbacks.

Naturally, because of the huge opposing orders at support and resistance levels, pullbacks tend to reverse around support or resistance levels, giving way to new impulse waves to emerge in the direction of the trend.

For an uptrend, a pullback moves downward and is likely to reverse at a support level, and since a typical trend line in an uptrend acts like a rising support level, there is a great chance that the pullback would reverse around the trend line because of the large number of buy limit orders at that level, as well the new buy market orders that come in when the price is around a trend line.

To trade a pullback reversal at a trend line, you must have a trade signal, such as a bullish candlestick pattern (bullish pin, engulfing, or inside bar) or an indicator signal (oscillator divergence signal) that tells you when a pullback has lost momentum and the price is likely to head upwards. Here is what you do:

-Identify an uptrend

-Attach your trend line correctly

-Wait for a pullback to reach the trend line

-Look for bullish candlestick patterns (bullish pin, engulfing, or inside bar) or an oscillator signal (oversold or divergence signal)

-Place a buy order and put a stop loss below the preceding swing low

-Trail your profit or put a profit target at 100% Fibonacci expansion level or the next resistance level

In the Dow chart below, the market is in an uptrend. Notice the bullish pin bar and inside bar patterns that formed around the trend line

trendline-startegy

Conversely, in a downtrend, the price pulls back by moving upwards and tends to stop at resistance levels and head downwards as a new impulse wave.

Since the trend line in a downtrend acts as a descending resistance level, there is a chance that, during a pullback, the price would reverse around the trend line and head downwards.

This is as a result of the huge number of sell limit orders at that level, as well the new sell market orders that come in when the price is around a trend line.

To trade pullbacks reversals with the trend line in a downtrend, look for bearish candlestick pattern (bearish pin, engulfing, or inside bar) or a bearish indicator signal (overbought oscillator signal or bearish divergence) around the downtrend line.

Those setups indicate when a pullback has lost momentum and the price is likely to turn downward. Here is what you do:-

-Identify a downtrend

-Attach your trend line correctly

-Wait for a pullback to reach the trend line

-Look for a bearish candlestick pattern (bearish pin, engulfing, or inside bar), overbought oscillator signal or bearish divergence

-Place a sell order and put a stop loss above the preceding swing high

-Trail your profit or put a profit target at 100% Fibonacci expansion level or the next support level

The AUDUSD chart below shows a downtrend. Notice the bearish pin bar that formed around trend line, as well as the classical bearish divergence in the indicator

trend line

Counter-trend line breakout strategy


With this strategy, you are still trying to trade a pullback reversal, but the only difference is that instead of using candlestick patterns or indicator signal to determine when to enter a trade in the direction of the trend, you use a breakout of the counter-trend line as your signal to enter a trade.

A counter-trend line is a trend line you attach to the pullback — as you already know, a pullback moves counter-trend (against the trend).

Thus, in an uptrend, your counter-trend line is pointing downward, while the main trend line is point upward.

 Conversely, in a downtrend, the main trend line is pointing downward, while the counter-trend line is pointing upward. 

This strategy is aimed at trading in the direction of the trend when the price breaks out of the counter-trend line, whether or not the pullback reaches the main trend line.

So, a break above the counter-trend line in an uptrend is an indication to go long. 

Here is how to trade this strategy in an uptrend:

-Attach your main trend line to show the uptrend

-Wait for the next pullback to start coming down, possibly making mini swing highs

-Attach a counter-trend line along the upper boundary of the pullback

-Place a buy order when the price closes above the counter-trend line and put a stop loss below the preceding swing low

-Trail your profit or put a profit target at 100% Fibonacci expansion level or the next resistance level

The XAUUSD chart below is in an uptrend. Observe the counter-trend lines and how a breakout above them marked the beginning of new impulse waves

trend line

On the flip side, for a down-trending market, a break below the counter-trend line attached to the pullback may be an indication to go short. Here is what you do:

-Attach your main trend line to show the downtrend

-Wait for the next price rally to start, possibly making some mini swing lows

-Attach a counter-trend line along the lower boundary of the pullback

-Place a sell order when the price closes below the counter-trend line and put a stop loss above the preceding swing low

-Trail your profit or put a profit target at 100% Fibonacci expansion level or the next resistance level

The Bitcoin/USD chart below shows a downtrend. Notice the counter-trend lines and how a breakout below them marked the beginning of new impulse waves

trend-line-trading

Using the trend line to estimate profit targets


Another way traders make use of trend lines is in creating a price channel.

A price channel is a pair of parallel trend lines within which the price oscillates, whether they are ascending, descending, or horizontal.

 In an uptrend, the price channel would be ascending, while it would be descending in a downtrend.

A horizontal price channel defines the boundaries of a ranging market

So, in a trending market, a price channel can be created by attaching another trend line across the opposite swings.

In an uptrend, attaching another trend line along the swing highs (as opposed to the swing lows where the main trend line is attached) creates an ascending channel, and that upper line indicates a rising potential resistance level where a trader can place their profit target.

In the GBPUSD chart below, the market was in uptrend. You can see that using the upper channel line to estimate the profit target would have worked fine.

trend line strategies

A descending channel for a downtrend is created by attaching another trend line across the swing lows (as opposed to the swing highs where the main trend line is attached).

The lower line indicates a descending potential support level. A trader can use that lower line to estimate their profit target.

The CHFJPY chart below shows a market in a downtrend. Using the lower channel line to set the profit target would’ve worked fine.

trend-line-trading

Using trend lines to trail your profits


While you may use profit targets and capture individual impulse swings when trading a trending market, you can also decide to ride the trend to its completion by trailing your profits, which you can do with different methods, including using a trend line.

Trailing your profit with a trend line is one of the most common uses of trend lines in a trending market.

This can be done manually or automated with the help of a script or an expert advisor. Many trade management expert advisors include a trend line option for trailing profits.

You simply add the script or expert advisor to your chart and input the necessary settings, and it automatically trails the price direction.

You get stopped out when the price crosses the trend line by more pips that the amount you set.

However, you can use a trend line to trail your profit manually by gradually shifting your stop loss order behind the trend line, as the price continues moving in the trend direction.

When doing this, you make sure that the stop loss is at the specified number of pips away from the trend at the corresponding price bar. 

In an uptrend, you gradually move your stop loss upwards at a set number of pips below the uptrend line.

For a downtrend, you gradually move your stop loss downward at the set number of pips above the trend line.

If the price crosses the trend line and hits your stop loss, you are out of the trade. See the examples below.

The GBPAUD H4 chart below shows an uptrend. It was possible to trail the profit just behind the trend line from December 2018 to April 2019

trend line trading strategies

The CHFJPY chart below shows a downtrend. Riding down the trend from January to October 2016 was possible with the trend line.

trend-line-trading

Trailing your profit with a trend line can be very tricky some times, as the price may speed up and move in a steeper trend.

Leaving your stop loss behind the main trend line would mean giving back a lot of your profit to the market.

To avoid this risk, you have to make a new trend line when the price moves in a steeper trend and trail your profit behind the new steeper trend line.

The EURUSD chart below shows 3 downtrend line. Notice how the slope kept getting steeper. Adjusting your trailing stop to suit each new trend line would prevent giving back too many pips.

trend-line-trading

Trend reversals


Obviously, one of the cardinal uses of a trend line is to know when the trend has changed direction.

Of course, a change in trend direction would mean changing your idea about the market and looking for trades in the new price direction.

This can help you catch a new trend in the early stages, providing you with the opportunity to make huge profits by riding the new trend.

Generally, these are the two ways to trade a trend reversal using a trend line:

-Trend line breakout strategy

-Trend line breakout + a retest


Trend line breakout strategy


The breakout of the main trend line may indicate a change of trend direction, and some traders trade the breakout immediately by entering a trade in the direction of the breakout once the price closes beyond the main trend line.

But not all trend line breakouts are worthy of trading, as the price may only be making a deeper pullback and would still cross the trend line again to continue in the trend direction. 

One of the ways to know if a trend line breakout is likely to be a trend reversal is to check how frequently the price was hitting the trend line before the breakout eventually occurred.

A breakout that occurs out of the blue may actually be a knee-jerk reaction following a news release, and the price is likely to cross back and continue in the trend direction. 

However, a breakout that occurs after the price has been clustering around the trend line, touching the trend line more frequently (with shorter durations between consecutive touches), is likely to indicate a trend reversal because the price has taken time to build strength for the trend reversal.

Here is how to trade a trend-reversal trend line breakout strategy in an uptrend:

-Observe the reaction of price around the uptrend line

-A close below the trend line after the price has been clustering around the trend line may be an indication to go short

-When you’re short, place your stop loss above the swing high

-You can trail your profit with a trend line in the new direction, or put a profit target at a support level or a Fibonacci expansion level placed per the expected price direction

The EURUSD chart below shows a downward breakout from an initial uptrend.

Notice how the price clustered around the trend line before a breakout, and the price continued to drop without retesting the uptrend line.

trendline

To trade a trend reversal in a downtrend using a trend line breakout strategy, here what to do:

-Monitor the price reaction around the downtrend line

-Wait for the price to close above the trend line clustering around the trend line — this may be an indication to go long

-When you’re long, place your stop loss below the swing low

-You can trail your profit with an uptrend line as the price continues to move up, or put a profit target at a resistance level or a Fibonacci expansion level placed per the upward price move

The chart below is that of Apple. When the price broke above the downtrend line, it never retested the trend line.

trendline trading

Trend line breakout + a retest


While some traders trade a trend reversal immediately the price break out of the trend line, others may want to wait for the price to pull back and retest the trend line before looking for a trade setup in the direction of the breakout. 

In this case, the broken trend line swaps polarity — that is, an uptrend line, which was acting as a support level, then becomes a resistance during the retest after a breakout.

Similarly, a downtrend line, which was acting as a resistance level, then becomes support during the retest after a breakout.

But the price getting back to the broken trend line may not be enough reason to place a trade.

It is helpful to add a candlestick setup or an indicator signal to your arsenal when trading this strategy. 

To trade this strategy following the breakout of an uptrend line, here is what to do:

-Wait for the price to turn back and retest the trend line

-Look for a bearish reversal candlestick pattern, such as bearish pin, engulfing, or inside bar pattern, or a bearish divergence signal

-Go short when the trade setup occurs and put a stop loss above the swing high preceding the breakout

-Trail your profit with a downtrend line as the price continues to move down, or put a profit target at a support level or a Fibonacci expansion level placed per the downward price move

The EURUSD H4 chart below shows a breakout below the uptrend line. Notice how the price retested the trend line and even lingered further before dropping.

trend line trading

This is how to trade this strategy following the upward breakout of a downtrend line:-

-Wait for the price to turn back and retest the downtrend line

-Check for a bullish reversal signal — a candlestick pattern (bullish pin, engulfing, or inside bar) or a bullish divergence signal

-Go long when the trade setup occurs and put a stop loss below the swing low preceding the breakout

-Trail your profit with an uptrend line as the price continues to move upwards, or put a profit target at a resistance level or a Fibonacci expansion level placed in accordance with the expected upward price move.

In the EURGBP chart below, the price broke out above the downtrend line.

The price retested the downtrend line before climbing up. Notice the bullish engulfing pattern that formed when the price retested the trend line and the hidden bullish divergence in the indicator.

trend line trading

Mistakes to avoid when trading with trend lines


Here are common mistakes traders make when trading with trend lines:


Not attaching the trend line properly

Some traders don’t place their trend line correctly — either it’s too steep or too lax.

A trend line doesn’t need to touch all the price swings — just the major swings are enough.


Expecting the price to reverse exactly at the trend line

As with horizontal support and resistance zones, a trend line is a zone too. The price may get a bit short of the line or a little beyond it.


Using a tight stop loss

When you use a tight stop loss, your trade is more likely to get knocked off by the usual price gyrations before the price even has the chance to move in any direction. 


Taking profits too early

Most times in trading, it’s not about the number of trades that are winners but how much profit you make from each win. Let your profit target be at least a 2:1 reward/risk ratio.


Final words


The trend line is one of the commonest tools used in technical analysis. Traders use it in different ways, such as anticipating where a pullback might reverse, estimating when a new impulse wave has taken off, establishing potential profit targets, trailing profit while riding the trend, or determining when a trend has reversed. Choose the one that fits your trading style and build your strategy around it.

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