*with InstaForex since 2008
How to build and see trend line on price chart
Open a price chart (it is recommended to open a daily chart). By zooming in and out the chart, make it show the previous market conditions and the moment when the market shifted from it to the current trend.
For example, you clearly see that the price was trading in a range for a long time, broke the upper boundary above, and the uptrend started.
Or, for instance, the downtrend dominated the market for quite a long time, but the price broke the resistance above and entered sideways trading.
Now that you see the moment when the current trend started, try to determine what it is: uptrend, downtrend, or sideways trading.
If the current market condition lasts long enough (let’s say, at least 5 days), you will likely see the resistance, support, upper, or lower range boundaries. Draw the line or lines that you see clearly.
However, the previous market condition could have been broken only recently and the new condition (new trend) has only started and has not formed its boundaries yet.
You should understand that a trend cannot develop without retracements. Long trends without retracements are very rare but still possible. If a new trend is forming, remember that the new market condition consists only of a strong movement at first and you should wait for a retracement of at least 30% or a stop in the price movement (clearly visible on a daily chart). Only after that you can build a new trend line.
Remark. Despite the simplicity of the concept, a trader needs careful attention and experience of plotting trend lines on a chart. Though trend lines are drawn like borders of a channel, a trader can face tricky situations. For instance, in case of an obvious trend, a price goes along a support trend line that is clearly displayed on a chart. However, there is a so-called fake breakout at one point (or two-three points in the chart). It means that a price breaches a line by its shadow for a short while and immediately returns to the previous channel.
This is a dubious situation. Strictly speaking, we should draw a new support trend line after a new reversal point appears. Some traders will do this way. However, others will take no notice of this reversal point and carry on plotting the old support trend line. It is essential to understand that the rules of market analysis do not work out rigidly but statistically. In case the market behaves against the rules, traders should be ready to accept losses.
One of the pitfalls of work with trend lines is false breakouts. We often see how the price reaches the support level (during the uptrend), breaches the trend line, and sharply reverses alongside the trend. Sometimes, before the price continues moving alongside the trend, it tries to breach the trend line for several hours or days but then reverses alongside the trend. There is no point in trying to understand market participants who attempt to break the trend line. You should accept this market peculiarity as a rule. To understand whether the trend line is breached and whether the trend is broken, market participants often use a time filter. If the price closed a trading day at the other side of the trend line, this trend is considered to be breached.
Attempts to trade against the trend are one of the key reasons why traders and investors lose their money. Keep in mind that you should trade alongside the trend during an uptrend or downtrend.
Your first task is to determine the market situation according to the price chart (uptrend, downtrend, or sideways trading).
The second task is to build support and resistance lines. For the uptrend, first draw the support line at price lows. Then draw resistance above and parallel to it.
During the downtrend, first build the resistance line at highs and then draw the support below parallel to it.
To get a range, build a support line on lows and a resistance line on highs.
Now we see the trend and have the resistance and support line. How to use it? The best points to open a buy deal during the uptrend are near the support line (place stop loss below the support). The target is at the opposite side of the channel, at the resistance line.
The best points to open a sell trade during the downward trend are near the resistance line (place stop loss above the resistance). The target is at the opposite side of the channel, at the support line.
During the sideways trading, the best points to open a buy/sell deal are near the support/resistance lines with stop loss beyond the line. Targets are at the opposite side of the range.
The daily time frame is the most important period for trend lines.
Our multiyear study of the market and trading shows that technical signals, such as a trend termination, trend formation, and others are stronger and more reliable on long time frames depicting these signals, trends, trading patterns etc.
On the one hand, a weekly, let alone monthly, time frame provides even more important data.
However, signals on weekly and monthly charts lag significantly. It often happens that a trader receives a signal for the beginning of a trend when the movement has almost ended and the trader fails to open a deal and profit from this movement.
On the other hand, smaller time frames, from an hour and shorter, generate many false signals.
That is why we recommend you to use a daily time frame as a main one and an H4 time interval as an extra one for trading on Forex.