Trend lines - how to trade them:
By TechGuy - November 29, 2017
Trend lines - how to trade them:
When using trend lines:
-Draw the lines through the edges of congested or ‘busy’ areas rather than the extreme high or low points. If a trend line can be drawn using the body rather than the wick of a candle, the body should be used. The extreme points are still important as highs and lows, but are not that useful for trend lines.
-The breaking of a well-established trend line may signal the trend is changing direction, as it shows that the dominant trading crowds have lost their power. Note that a trend line break is only valid if the candlestick closes on the other side of the line.
Trend lines are used in many different ways by different traders. New traders usually open a trade when they see something unusual happen in the market, whereas an experienced trader waits for prices to finish the unusual movement and then opens a trade, knowing that the price will most likely return to its long-term trend
‘Trend’ is a term used to describe prices moving in the same direction over time. When prices are generally rising, this is known as an uptrend, and when they are falling, this is a downtrend. Prices tend to trend only 20-30% of the time, which means that the remaining 70-80% they are trading in a range or without a clear direction. For this reason, it is important to have a clear way of identifying the existence of a trend, or lack thereof. There is a simple rule traders use to confirm a trend. In an uptrend, we look for two consecutive higher highs and higher lows in an uptrend, and a third higher high confirms the uptrend in a downtrend, we look for two consecutive lower lows and lower highs, with a third lower low confirming the downtrend. Start by checking for a trend on a shorter time frame, and once you identify it, run the same check on a longer time-frame. For example, if you confirm a trend on the 30 minute chart, look at the 4 hour chart and also confirm it there. If you get confirmation, go back to the first time frame and look for a good entry point. Remember, the trend is your friend, meaning it is less risky to trade in the same direction as the trend than to go against it. For this reason, if you identify an uptrend it is safer to buy, and if you find a downtrend, it is safer to sell.
Traders can place limit orders to buy at the support line...
Eventually, the price will stop following the trend and fail to reach a new high or low. It will stall, and then reverse direction. Traders often use another rule to identify trend completions or reversals. During an uptrend, if the price reverses down and dips below the most recent low, then it may be a sign that the uptrend has broken. Similarly, if during a downtrend the price bounces up and rises above the most recent high, the downtrend may have come to an end (see image above). Drawing a trend line on your chart can help you see the trend and decide when to enter or exit a trade. To draw an uptrend line you need to connect at least three lows. For a downtrend line you need to connect at least three highs. For a downtrend line you need to connect at least three highs (see next image).
Traders can place limit orders to sell at the resistance line..
-Draw the lines through the edges of congested or ‘busy’ areas rather than the extreme high or low points. If a trend line can be drawn using the body rather than the wick of a candle, the body should be used. The extreme points are still important as highs and lows, but are not that useful for trend lines.
-The breaking of a well-established trend line may signal the trend is changing direction, as it shows that the dominant trading crowds have lost their power. Note that a trend line break is only valid if the candlestick closes on the other side of the line.
Trend lines are used in many different ways by different traders. New traders usually open a trade when they see something unusual happen in the market, whereas an experienced trader waits for prices to finish the unusual movement and then opens a trade, knowing that the price will most likely return to its long-term trend
2 comments
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ReplyDelete"Which Forex pair and time frame is best to trade" is the frequently asked question and I want do give you the DEFINITE ANSWER.
ReplyDeleteAre you expecting that I am going to say something like EUR/USD on 5-minute time frame or GBP/USD on daily...? No, it is not so simple, but SIMPLE ENOUGH we can figure it out!
The "PROBLEM" is that markets change over time. If GBP/USD was a well trending currency pair a few years ago, today it is another one.
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