In order to draw a trend line we have to find a place to start. Often times that means looking back in time and perhaps more time than you can fit on your chart in one window.
If the trend has continued for some time, you should switch to a time frame higher.
The first example, the chart below is the EUR/USD one hour.
You will see several different trend lines as the trend continues.
One of the first things a trader will do with a trend line is to quickly identify the most obvious trend line. If the trend line isn't broken, then it is easy to assume that the trend is still in tact and for the most part it could continue.
Another reason to draw trend lines is to determine when the trend is changing.
Below you will notice how simple the trend line looks in the first chart picture below.
There are at least two points that touch the trend line to confirm it.
Something that most traders will do, is to count the number of times the price has touched and held at the trend line. This helps to determine the significance of the trend line. Typically, the larger time frames will produce trend lines that have been touched several times and are quite significant.
EUR/USD one hour chart 1
The chart above is pretty easy to read and the trend line shows at least two locations where price touched the trend line from the beginning.
But lets take a step back and see where this up trend in price actually began. It is important to find the true trend line to see just how far price has to move through a trend line to confirm a change in price direction.
EUR/USD chart 2
The chart above is the same time frame as chart 1 but I added much more data and found another trend line.
Why is this important?
Because if you begin to focus on a small area of current price action, you could easy allow yourself to think that a price trend is changing. If you think right away that a trend in direction is changing just because the trend line has been broke you can make a serious mistake and lose money. There is much more work that needs to be done to confirm that price is definitely changing direction.
Looking at the first chart 1.
Price would not have to move too far down, (perhaps 40 or 60 pips in price) to cut through the most recent up trend line.
If this happens to the inexperienced, they begin to immediately short this pair. The trouble is that this is not true confirmation (yet) of the trend change.
If you begin shorting immediately when price crosses a short term trend line like the one in chart 1, you will could lose as price finds some support on the other side of the trend line.
Support such as Fibonacci retracement levels or an old resistance level could “become” support. The reason is again, that the first chart doesn't show the true measure of the trend itself, where it began, how long it has been trending and where it is likely to stop and find some resistance.
Chart 2 (above) shows a much better idea of where the true trend line runs, but is that one correct?
Let's step back further...
Below is a third chart using the same currency pair and the same time frame.
The candles are getting harder to see but I am trying to illustrate the necessity to take a step back and look at where price has come from and also to identify support and resistance.
EUR/USD chart 3.
In this chart you will now see the original trend line from chart one in the top right corner. Notice how sharp and steep the trend line looks in this chart. That is not a trend line that I would use to identify a reversal in price. It's much too steep and looks like it could keep moving higher. If price cut through the first up trend line, taking into consideration the information we now see in this third chart, I could expect price to find some support and bounce back up, meaning that I would most likely not take any short or “Sell” positions here.
Now the same information can be found by using a time frame higher. Lets look at the 4 hour chart below for the EUR/USD.
The chart below shows us just about the same information without having to squeeze in so much data that we can't see the candle patterns. You will notice that the only trend line I have on this chart is the last one as in chart 3.
EUR/USD chart 4
see part two
If the trend has continued for some time, you should switch to a time frame higher.
The first example, the chart below is the EUR/USD one hour.
You will see several different trend lines as the trend continues.
One of the first things a trader will do with a trend line is to quickly identify the most obvious trend line. If the trend line isn't broken, then it is easy to assume that the trend is still in tact and for the most part it could continue.
Another reason to draw trend lines is to determine when the trend is changing.
Below you will notice how simple the trend line looks in the first chart picture below.
There are at least two points that touch the trend line to confirm it.
Something that most traders will do, is to count the number of times the price has touched and held at the trend line. This helps to determine the significance of the trend line. Typically, the larger time frames will produce trend lines that have been touched several times and are quite significant.
EUR/USD one hour chart 1
The chart above is pretty easy to read and the trend line shows at least two locations where price touched the trend line from the beginning.
But lets take a step back and see where this up trend in price actually began. It is important to find the true trend line to see just how far price has to move through a trend line to confirm a change in price direction.
EUR/USD chart 2
The chart above is the same time frame as chart 1 but I added much more data and found another trend line.
Why is this important?
Because if you begin to focus on a small area of current price action, you could easy allow yourself to think that a price trend is changing. If you think right away that a trend in direction is changing just because the trend line has been broke you can make a serious mistake and lose money. There is much more work that needs to be done to confirm that price is definitely changing direction.
Looking at the first chart 1.
Price would not have to move too far down, (perhaps 40 or 60 pips in price) to cut through the most recent up trend line.
If this happens to the inexperienced, they begin to immediately short this pair. The trouble is that this is not true confirmation (yet) of the trend change.
If you begin shorting immediately when price crosses a short term trend line like the one in chart 1, you will could lose as price finds some support on the other side of the trend line.
Support such as Fibonacci retracement levels or an old resistance level could “become” support. The reason is again, that the first chart doesn't show the true measure of the trend itself, where it began, how long it has been trending and where it is likely to stop and find some resistance.
Chart 2 (above) shows a much better idea of where the true trend line runs, but is that one correct?
Let's step back further...
Below is a third chart using the same currency pair and the same time frame.
The candles are getting harder to see but I am trying to illustrate the necessity to take a step back and look at where price has come from and also to identify support and resistance.
EUR/USD chart 3.
In this chart you will now see the original trend line from chart one in the top right corner. Notice how sharp and steep the trend line looks in this chart. That is not a trend line that I would use to identify a reversal in price. It's much too steep and looks like it could keep moving higher. If price cut through the first up trend line, taking into consideration the information we now see in this third chart, I could expect price to find some support and bounce back up, meaning that I would most likely not take any short or “Sell” positions here.
Now the same information can be found by using a time frame higher. Lets look at the 4 hour chart below for the EUR/USD.
The chart below shows us just about the same information without having to squeeze in so much data that we can't see the candle patterns. You will notice that the only trend line I have on this chart is the last one as in chart 3.
EUR/USD chart 4
see part two
