The correct way to draw a trend line- part one

4xtradingcoach

Active Trader
Nov 4, 2012
139
0
32
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the4xcoach.com
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.

2zzot21.jpg

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
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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.
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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
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see part two
 

4xtradingcoach

Active Trader
Nov 4, 2012
139
0
32
US
the4xcoach.com
The correct way to draw trend lines - part two

Now another way to find out where the trend has changed and shifted directions is to continue looking back in time until you see where the trend crossed. In chart 4 which is the four hour chart above, we still don't know for sure if the bottom left where the trend line began is the actual low or start of the trend.
Lets have a look...the next chart below is the same 4 hour chart of the EUR/USD but I squeezed more data into the chart so we could see back further.
EUR/USD chart 5
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At this point we will leave it here but you can see the importance of finding the source of the trend on the chart and how to identify the strength based on the angle of the trend.

Now that we have ways of finding the trend lets see how to draw trend lines correctly.
In the example below we will be looking at the GBP/USD 4 hour chart.
We will start at the present time and identify the trend lines and then analyze the possibilities and the mistakes that can be made when drawing a trend line.
GBP/USD chart 6
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Please notice at the top right of the chart, there is a white arrow pointing down. I put that there to show how price has found some resistance at the bottom side of the up trend line. This is important from a technical perspective! You must draw your trend lines correctly and do not become lazy about updating them.
In the chart below I will show you the same GBP/USD 4 hour chart but I will show you how the trend lines might have looked a few days back.

GBP/USD chart 7
wafr7m.jpg


In this chart please look at the bottom left and notice where the trend line started and follow it up to the next arrow. At one time, this is where we had a our trend line and it was the proper placement but as time moves on and price made a new high, we must go back and adjust the trend line when necessary.

The first thing to do when considering whether to adjust the trend line is to confirm a new high or low. We all know the rule... “Two to the left and right must be lower to confirm a high” and the opposite is the rule for confirm a low.


GBP/USD chart 8
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In the chart above we can see when price made new highs. This is the time to make the change to the up trend line.

see part three
 

4xtradingcoach

Active Trader
Nov 4, 2012
139
0
32
US
the4xcoach.com
The correct way to draw trend lines - part three

GBP/USD chart 9
sbsrrm.jpg

In the chart above, I have made the proper adjustment and again, notice how it shows up in the top right area of chart. This again would be a technical resistance level that would help me determine whether or not I should exercise caution at these levels.
Notice the low I used to draw the up trend line at the arrow pointing up.
This is the last price swing before the last spike high. It is the proper place to draw this trend line. If I was lazy about making adjustments to the trend line and left it in the position I had it before on the chart above, then I might not have had the opportunity to see the potential resistance when price reached the bottom of the up trend line (where price is currently)
These rules apply regardless of the time frame used.

end
 

ituglobal

Master Trader
Apr 17, 2013
495
27
69
The reality is that trendlines are often subjective when they're drawn. They're usually drawn according to the chartist's bias.
 

Rob Taylor

Active Trader
Oct 14, 2012
131
2
37
UK
www.tradeforexmakemoney.co.uk
Why would you want to draw a trend line? If you cant recognize an up trend from a down trend without drawing a line then its time to stop trading.

Trend lines are of no use to you whatsoever, and if you are happy to trade off them, then i will be happy to keep taking your money. :)
 

Ary Barroso

Active Trader
Jul 9, 2017
908
70
39
34
I think, it’s very easy to draw a trend line in a clean trendy market; but the job is too hard in the rangy market! I basically use horizontal lines during the rangy market instead of trend line!
 

Lesiro

Trader
Mar 4, 2018
40
3
13
30
Very insightful analysis of utility of trend lines and how to use it and very cynical reactions to it! Looks like people could not understand the same! Trend lines play an important role to differentiate between technical correction and actual trend reversal. I believe the sharpness of the move down towards the trend line, which essentially means how fast it is moving, can also give some hint on whether it is going to be a technical correction or trend reversal.