In forex trading, we understand a trend as the tendency towards price movement. In general, the trend itself is of three types, namely bullish (upward trend), bearish (downward trend), and sideways (price moves up and down in a certain range only).
However, the reality of price movement is not straight in one direction only, but as if zig-zag or continuous fluctuation. So, traders need to draw a forex trendline to identify what trends are going on in the market.
If depicted correctly, trendlines in forex can provide traders with as accurate signals as technical indicators. In addition, fundamental analysis users can use to understand price trends in the long term.
Best How to Draw Trendlines in Forex Trading Tips
Therefore, knowledge of how to draw trendlines in the following forex must be mastered by every trader.
Also read: What is Support Resistance in Forex Trading?
1. Identify Support and Resistance
To draw a trendline in forex, you need to mark the highest (High) and Low (Low) price levels on a price chart which also acts as Support and Resistance.
For example, as shown in the EUR/USD price chart below.
Note that the peaks marked in green represent Resistance, while the troughs marked in pink represent Support. This benchmark will be used to draw the trendline.
2. Draw a Trendline of Adjacent Resistance and Support
After identifying Resistance and Support, the next step is to draw a trendline. Forex trading applications (Metatrader etc.) are usually equipped with tools (tools) to draw trendlines.
To draw it, click on the tool, then follow the rules:
- Upper Trendline: Draw a line from Resistance to the next Resistance. It takes a minimum of two resistances to draw this trend line. However, the more resistance points that form a trendline, the stronger the trendline.
- Lower Trendline: Draw a line from Support to the next Support. It takes a minimum of two Supports to draw this trend line. However, the more support points that form a trendline, the stronger the trendline.
- Don’t force the trendline to be a certain shape or according to your own will. If it turns out that it is difficult to draw a certain trend line, then it may not be possible to draw it now, or the market conditions are uncertain (choppy).
Also read: Understanding Time Frames in Forex
As a result, from the EUR/USD chart, there are two trends, namely sideways and bearish. The sideways trend is framed by the blue line, while the bearish trend is indicated by the highest level (High) which is getting lower and lower (red line).
You can also draw trendlines that overlap each other. For example, in the USD/CHF chart below:
In the middle of the chart, the USD/CHF is bearish (red trendline). After the price breaks above the trendline, the movement turns bullish for a while (green trendline), then falls again.
Now, USD/CHF is moving at the range 0.9932 after triggering a resistance, so that the red trendline can be drawn again which indicates a bearish condition.
3. Using Trendlines To Trade Forex
Once you have finished drawing the trendline, you can use it for forex trading. Usually, traders use the trendline as a reference for bounces and breakouts. The rules:
- If the price bounces (bounces) from the upper trendline, it means that the price has the potential to fall to reach the lower trendline.
- If the price bounces from the lower trendline, it means that the price has the potential to rise until it reaches the upper trendline.
- If when the bearish price breaks the upper trendline, it means that it might be the start of a bullish trend.
- If when the price is bullish, there is a breakout of the lower trendline, it means that it might be the start of a bullish trend.
To confirm bounces and breakouts, you can take advantage of other technical indicators or observe what candlestick patterns form near the bounce and breakout points.
If you do not understand the specific terms in forex.bacalagers.com on this page such as bearish, bullish, and trendline, you can visit Forex Dictionary. Take advantage of Forex Dictionary when you encounter new vocabulary for optimal understanding.