Learning how to properly use trend lines when trading the forex market can add yet one more tool to your technical analysis tool box. However, trend line analysis is rather subjective, so, there are some general rules of thumb you want to keep in mind when trading with trend lines.
• Don’t use trend lines alone
Different traders will draw their trend lines in different places on a price chart, it all depends on how many bar highs or lows you want to connect, therefore, trend line analysis can be rather subjective and so it should not be used as a stand-alone forex trend line trading strategy. The best way to use trend lines is as a factor of confluence in the market, this means that if a trend line meets up nicely with a level of support or resistance, or a Fibonacci retracement level, or perhaps a moving average, it will add “weight” to any forex trading strategy.
In the daily chart of Gold below, we can see a pin bar setup, also known in candlestick terms as a hammer, which has occurred near a level of horizontal line and trend line confluence. So, you see that we can easily combine the horizontal line forex trading strategy with trend line forex strategies to add weight to any price pattern setup.
In the daily chart of the GBPJPY forex pair we can see another pin bar or hammer setup that formed at a confluent level, this time the level of confluence included a trend line and a Fibonacci 61.8 retracement.
• How to draw trend lines in forex
Trend lines are drawn from one bar high to another, or from one bar low to another, obviously they are used to connect non-horizontal bar highs or lows, which typically means a market is trending. The trend line should just touch the exact high or low of each bar, since this is the price point at which price reversed in the opposite direction it goes to reason it is a critical level.
The other major issue traders encounter when using the forex strategy of trend line analysis, is how many bar highs or lows to connect the trend line to. You obviously need at least two bar highs or lows to touch a trend line in order for it to be valid, and generally speaking the more bar highs or lows that touch a trend line, the more valid the trend line is.
A down trend line will connect bar highs while an uptrend line will connect bar lows.
• Trading breaks of trend lines
Trading a break of a trend line can be a very good forex trading strategy, however, there is one way to do it that is safer and more conservative than just taking a blind intra-day break. What you want to do is wait for the initial trend line break, then wait for price to retrace back up or down to the trend line break out area and then you enter a position in the direction of the initial break out.