Forex trend line drawing is a critical tool in forex trading analysis. Trend lines allow you to see both support and resistance points on a chart. These are then used to help you determine what type of trading activity to pursue. Trend line drawing is highly recommended for proper analysis of both short and long term market activity.
Let’s first cover the ideas of support and resistance. If you take a look at the room you’re in, the ceiling would be a resistance point. When the market is not going up, we call it “hitting a resistance point”. As traders, you want the market to “push through” the resistance point or a support point. The support point is the floor in the room. It is the bottom side “support” to price fluctuations. When you begin drawing trend lines, it makes it very easy to spot both support and resistance points. The trend line will enable you to see the overall direction of the position and will then lead you to the support and resistance points.
The first thing you’re going to look at is placing your trend line on the bottom points of an upward trend. You need at least three points along a trend in order to have a valid trend line. Keep in mind, the more points you have and the longer the time period you’re working with, the more accurate your trend line is going to be. However, you can also adjust your overall scope from short to moderate to long term trends. As you’re tracking a position in any market and establishing its trend line, be aware that the line may move. As the points adjust up and down, simply re-draw your trend line including the new points. Once you find the new direction, support and resistance points will help you anticipate more significant upturns or downturns in price. “Breakthroughs”-when the market moves quickly through support or resistance-are some of the best opportunities for profit, because they produce very rapid price changes. Read more on breakthroughs and breakouts here.
Forex trend line drawing simply works in reverse with a downward trend. When you’re reviewing a position that has an overall downward slope to the price points, you’ll place the trend line along the top points of the chart. This will show that the upward price points are still sloping down overall. Again you’ll be looking at a minimum of three points to get a valid trend line.
As we wrap up these tips on forex trend line drawing, we should consider a few cautions. The first thing to keep in mind is that when the position activity breaks the trend line one way or another, you can’t automatically assume that the trend is over and that a shift is taking place. Any trend will only last so long. Continue adjusting your trend line until you actually see the line swing completely from one direction to the other. A final thing to consider is how steep the trend line is. A more balanced line will tend to be more accurate. If you’re finding very steep trend lines, either the market is changing very rapidly, or you’re drawing the lines wrong. A high number of steep trend lines probably points to a problem in your method.