The Trendline is among the most important tools used by technical analysts.
Rather than looking at past business performance or other fundamentals, technical analysts look for trends in price action.
And what better tool to look for trends than a trend line, right?
Why is it important to identify the trend, I hear you scream?
Well, technical analysts believe that identifying the trend is the first step in the process of making a good trade.
But more on that later.
First things first.
A trend line is a straight line that connects two or more price points and extends into the future to act as a line of support or resistance.
Trend lines connect significant lows in an uptrend and they connect significant highs in a downtrend, creating dynamic resistance.
Dynamic resistance means that as time changes, so does the price of the support or resistance.
For example, in an uptrend, the level of support goes up as time progresses. In a downtrend, the level of resistance goes down as time progresses.
An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope..
A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope.
IMPORTANT: At least three points must be connected before the line is considered to be a valid trend line.
Let’s see what Uptrend and Downtrend look like on an actual forex chart.
To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.
Really, it’s that simple.
Want to see another example of what downtrend and uptrend look like on a forex chart?
There ya go!
Notice that when drawing trend lines in a downtrend, you draw them above the price. When you draw trend lines in an uptrend, you draw them below the price.
Yup, that’s right. There is a third type of trend on top of Downtrend and uptrend.
A sideways trend is the horizontal price movement that occurs when the forces of supply and demand are nearly equal.
In a sideways trend, the price moves in a narrow band, neither going upward nor downward.
Since there is no clear directional trend, sideways trends can be very frustrating for short-term traders and trend traders.
There are three types of trends:
In case you ever get confused, we have prepared a little cheat pic for you.
Feel free to download it by clicking below.
REMEMBER: It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.
And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market.
If it doesn’t fit, you must acquit.