If you’re interested in trading forex, then you’ve probably heard of technical analysis, and if you’ve heard of technical analysis, you should have come across the phrases “forex line trading” and “forex trend lines” a time or two.
Despite having heard of line trading, all its intricate tricks and secrets might be a foreign concept for you (well, duh! You’re here for a reason). You know that trendlines can assist you with determining the direction in which the market is moving, but how can you actually capitalize on them? How can forex line trading help you set an actionable trading plan that’ll give you clear instructions on finding entry and exit points and risk management measures?
Well, this blog is all about that.
Buckle up to learn all about trend lines, their meanings, and the strategies you can use with them to make money!
What Are Trend Lines in Forex?
Trendlines, or trend lines, are pretty much what their name suggests. They are lines you draw based on the data you get from an asset’s price action, which can help you find the general direction the market is moving in.
Despite the simplicity of the concept, using trendlines the right way is an intricate art you need to practice long and hard to master. However, having a simplified guide could significantly ease your job.
Forex trendlines consist of important price points in a currency pair’s chart, namely highs and lows. By connecting two of these points, you’ll get yourself a trendline. Of course, there are some adjustments you need to make to this initial line to make your trendline more reliable. But that’s for later to discuss.
The primary use of a trend line is to identify and/or confirm the market’s ongoing trend and also find support and resistance levels. These two functions make forex line trading a simple yet vital concept for traders.
Much like any other technical analysis tool, trendlines also come in different variations, including uptrends, downtrends, and sideways trends.
Upward, AKA Ascending Trendlines
Upward trends are drawn by connecting 2 or more swing lows that progressively go higher. In other words, they connect higher and higher lows, creating a line with a positive slope.
By extending these lines into the future in forex line trading, they can turn into support lines, suggesting there are buying opportunities near newer, higher lows.
Uptrends are a symbol of increased demand in the market, indicating the continuous rise of buying pressure and giving birth to bullish trends. As long as the price keeps moving up, the bullish trend continues.
Downward, AKA Descending Trendlines
Similarly to upward trends, in forex line trading, downtrends are drawn when 2 swing highs that get progressively lower are connected. The line these points create has, therefore, a negative slope.
Downward or descending trendlines can also be extended into the future. The only difference here is that they will act as resistance lines, indicating selling opportunities when the price approaches the line.
Unlike uptrends, descending trend lines show how the market’s supply has gone up, and the selling pressure is increasing. This, of course, creates a bearish trend, which continues as long as the price keeps moving with a general, negative slope.
Sideways, AKA Horizontal Trendlines
When the market enters periods of consolidation, you’ll get horizontal trendlines by connecting the highs or lows in the chart.
Sideways trends usually take place during prolonged upward or downward trends. The reason behind this is the price’s inability to continue moving up or down sustainably without stabilizing itself along the way.
The trendlines you draw during consolidation periods become flat support and resistance lines you can extend further and use in your analysis.
How to Draw Trend Lines Correctly?
The first step in forex line trading, which is drawing trend lines, is the most important one. To draw these lines correctly, follow these steps:
- The first step in drawing a trendline is almost too easy. Find 2 significant swing highs or lows and connect them to each other.
- Next, you have to adjust your trendline to catch as many “touches” as possible. By touches, we mean the times when the price highs or lows make contact with your trendline. It doesn’t matter if it’s the candle’s body or shadows that touch your trendlines as long as the candle creates an extreme point in your chart.
- After that, you can use other technical indicators, such as moving averages, candlestick patterns, or the relative strength index (RSI), to confirm your trend.
- Last but not least, extend the line into the future. Only make sure that your line is not too steep or too short, as these will reduce its validity.
Forex Line Trading Top Strategies
To successfully incorporate forex line trading into your routines, there are some strategies you can use. These strategies are simple but require time and practice to master. So, we suggest you open yourself a demo account and get to work after finishing this guide.
1- Trendline Breakout Strategy
A common trend line strategy in forex trading is using trendline breakouts as a means to determine your entry and/or exit points. To do so, you need to first draw your trendline.
Let’s say you’ve got an upward trend going on. In such a scenario, your trendline will act as a support level. Now, if the price manages to cross over this level and go below it, you call that a bearish trendline breakout.
Similarly, when the market has a bearish trend, and the price still manages to break through the resistance level, you’ll have a bullish trendline breakout. Breakouts usually suggest possible changes in the direction of the market’s trend, whispering words of reversal.
Of course, there could always be false breakouts, which is why you need to confirm the breakthrough before taking action. You can use other indicators, such as market volume and sentiment, to see if the breakout is real or if it’s a false whisper.
Depending on the type of breakout you’re dealing with and your pre-existing stance, you can decide to enter or exit trades.
2- Trendline Bounce Strategy
Trendline bounces are another common forex trend line trading strategy. A bounce happens when the price approaches the trend line and then bounces back from it, continuing in the direction of the trend.
Bounces can also provide great opportunities for traders to take advantage of. To do so, you need to draw your line and watch the price closely for a bounce. When you catch one happening, you need to confirm it using other indicators such as candlestick patterns or increased trade volume in the direction of the bounce.
As soon as the bounce is confirmed, you can place your order. If you have a bullish bounce, you can go long. On the other hand, entering a short position is a good idea when there’s a bearish bounce.
It’s important to set your stop-loss and take-profit levels before entering a trade. That way, you can protect your capital and maximize your gains at the same time.
Important Forex Line Indicators
One of the main principles of being a successful forex trader is to always look at the bigger picture. What do we mean, you ask? We mean that you should never rely on only one indicator or signal to make your trading decisions. Instead, look for other ways to confirm or deny your signal.
It’s the same way with forex line trading as well. While trend lines have proven to provide great insights into the market’s price action and where things might go, they’re simply not enough. As a result, it’s best to use them with other indicators, such as RSI, moving averages, Bollinger bands, and Fibonacci retracement levels.
For example, the relative strength index (RSI) determines if a currency pair is overbought or oversold. In other words, it tells you if the pair is too expensive or too cheap.
On the other hand, moving averages show the average price of the pair over a certain time period. They can help you determine if the trend is going to continue or reverse.
Lastly, we have Bollinger bands and Fibonacci retracement levels. Bollinger bands help traders find if the market’s volatility is low or high, while Fibonacci levels show quantitative levels where the price might reverse.
By using the signals of the aforementioned indicators along with your trendline analysis, you can get a more comprehensive sense of the market sentiment and how things are gonna go.
Pros and Cons of Forex Line Trading
The advantages of forex line trading include:
- Trend identification: Well, duh! They help you find the general direction in which the market’s moving.
- Straightforwardness and simplicity: Trendlines are rather easy to draw and understand. As long as you maintain some good ole’ precision, that is.
- Support and resistance determination: Trend lines in FX can help you find two very important price levels, which can be used to determine your entry and exit points.
- Versatility: One of the best things about trendlines is that they’re versatile and can be used in pretty much any timeframes. Of course, the higher the timeframe is, the more reliable the trend line becomes.
There are also some downsides to using trendlines, which we’ll discuss below:
Subjective nature: Trendlines depend on the trader’s viewpoint.
False breakouts: As mentioned before, trend line breakouts might only be false whispers of reversal. So, it’s super important to confirm the breakout before entering/exiting your trades.
Lagging indicators: Trendlines are drawn in accordance with previous price movements. They might, therefore, not always be able to predict future price movements successfully.
Wrap-Up
Forex line trading consists of using previous price points to draw trend lines. You can then use these trendlines to predict how the price is going to move in the future. Trendlines can be bullish, bearish, or sideways, which signal different potential outcomes each.
Some strategies you can use with trendlines include trendline breakouts and bounces. Of course, you should use these strategies along with other indicators, such as reversal candlestick patterns, RSI, and Fibonacci retracement levels. You should also not forget to follow your risk management strategy to a T.
We understand that all these steps could be confusing and a lot to handle. So, if you feel frustrated with that, you can open a demo account with us today and get to practicing ASAP!
Forex line trading uses trendlines to predict possible price movements in the future. The trendlines themselves are drawn based on the previous price data from the charts.
Trendlines can be bullish, bearish, or sideways. Upward trendlines are drawn by connecting higher low points in the chart. Downward trendlines connect lower highs, and sideways lines connect peaks that form when the price oscillates within a specific range.
Two of the most well-known trend line strategies include using trendline breakouts and bounces. Each strategy requires drawing a trendline, finding the breakout or bounce, confirming it, and entering/exiting trades.
Submit Your Comments
(Replying)
Please keep in mind to avoid offensive keywords and also fake information.
Be the first one to comment.