The financial markets are of various types and are huge in themselves, so for a trader to invest their capital in such markets is full of risk. They have to study, analyse, plan and use several strategies to have a successful trading experience. The forex market is part of the financial markets, which is wide enough to incorporate millions of traders.
In addition, the market is highly liquid, with frequent opportunities for traders to invest and generate income. However, the market is highly volatile, making it challenging for traders to succeed with their trade.
To minimise the risks associated with the market, traders use trading tools and platforms. It could be technical or fundamental analysis or charts and patterns, indicators, timeframes, and many more. One of these is a helpful and valuable trade feature for forex and other markets named trend lines.
Trendlines are part of charts and patterns that are formed to have an analysis of market movements in the prices. The article goes into detail about the forex and how it uses trend lines. By the end of the article, readers would be able to make good use of trendlines in their investments in the future.
What is the Forex market?
The forex market is a 24 hours trade market that trades in international currencies to make money. One of the largest markets, forex, is the short form of the foreign exchange market. Usually trading in over-the-counter or interbank systems with primary investors such as banks, financial institutions, corporations, etc.
A global decentralised market determines the exchange rates for the currencies. Traders can buy, sell or speculate on the foreign currency with high trade volumes. The currencies of the forex market are in pairs with base and quote currency to have fair trade practices. A totally online market with the best services through reputed brokers facilitates leverage, marginal calls, major currency pairs, etc.
The major currency pairs of the forex market are:
- EUR/USD
- USD/CAD
- AUD/USD
- GBP/JPY
- USD/JPY
- GBP/USD
What is the Trend line?
To analyse the market, traders easily use the trend lines that could be recognised on the charts and patterns. The traders draw trend lines to establish a connection between the prices of the market instrument traded. This aids them to have an idea of the market dynamics and what could be the possible change in the market trade.
Traders draw trend lines either above the pivot highs and below the pivot lows, which helps them to predict the prevailing price direction. They are, thus, the visual representation through the lines of various factors such as the price, speed of price, and the price contraction periods. Traders can even spot the support and resistance levels using the time frames.
Thus, traders get a clear picture of the market movements in the price of the instrument with trend lines. A valuable technique for traders to analyse and study the market in advance for a successful trade.
Trendlines: Perspective and Analysis
Trendlines are technical tools that are used by technical analysts to get an idea of price fluctuations. The technical analysts look for trends in the price movements and do not consider other factors such as fundamental or past trades. Thus, traders know about the trend in the price changes and ignore other perspectives of the market.
For a good and considerable trade, traders should identify the trend in prices to have an impactful and effective trade. According to the technical analysts, a trend study is the first step for analysis of the financial markets. To draw trend lines over the charts, traders should have at least two points. Moreover, traders can use various time frames as per their requirement; it could be a one minute time frame or a five minutes time frame.
Trend lines are popular among the forex market and other markets for analysis because of their availability in every sector and universal usage. Traders can use them with the time frames, intervals, or time periods and can even do so without these options. However, the trend lines are easy to use and could be read simply.
Traders have to draw the open, close, high, and low of the trade instrument over a chart for a specified period of time. Then traders can connect these lines and get a perspective and analysis of the market trend. For example, if there is a rising trend in the instrument, it is thought to be support while entering the trade position. In such conditions, traders should go for a long market position. However, if the trend lines move downwards, traders should use it as an indicator of market change and exit the trade position.
Trend lines are not drawn frequently; however, these are adjusted with the time periods when required. A considerable source of information for traders to get price fluctuations on time and have well decided market decisions.
Trend lines: Components
Trend lines are formed using various components to get exact data and have a clear picture of the market changes. A simple line of mathematical graphs also has factors involved to determine it, so to build a technical analysis of price movements, traders use the following components.
Uptrend
The uptrend line is a line sloping upwards with a certain data and specified time period. There are two or more points that make it possible for traders to form trend lines. The uptrend has two low points, in which the second low is higher than the first low, forming a positive slope upwards. To have a valid trend line, there must be three points justifying and connecting the points.
The uptrend line is an indicator of support with high demand and less supply of the instrument, increasing with the price. The trend line with prices above it shows an intact and strong market position of the trading instrument.
Downtrend
In contrast to the uptrend, the downtrend is formed with two or more points that have a negative slope. The second point of the trendline is higher than the first point, connecting the three points to validate it. It indicates the resistance and represents the high supply and low demand of the instrument in the market. Thus, prices decline, and supply increases.
Scale Settings
It is a significant part of trend lines to draw the lines; traders have to be aware of scale settings to have proper lines drawn. Using the semi log scale, traders get better trend lines with high and low points appearing on the lines. In the long term trend lines, there is an essential shift in the prices, making the use of a semi log scale necessary.
Traders can set their charts and patterns scale as per the arithmetic and semi log scales. Displaying incremental values in numbers and percentage, respectively.
Validation
Trend lines cannot be drawn like that; they require two or more points for connection. With more points to draw the lines, traders get a more validate trend line with support and resistance levels represented. However, constructing the trend lines is not easy as the points may not sometimes match, or there may not be sufficient points to draw lines.
Trend lines work on the general rule that there have to be two points to construct the trend lines, and a third point is required to confirm the validity of the trend lines.
Spacing of Points and Angles
The spacing between the points of trend lines should be at the proper place. The uptrend line should not have points too close or too far, low and high points. The space should be as per the time frames, pricing, preferences, and degree of price movement. As the points spacing is not proper, it could question the validity of the trend lines.
An evenly spaced trend line is the ideal trend line to study the market patterns.
Angles of the trend lines formed due to sharp decline in the trend lines give no proper and meaningful indication of support and resistance levels. Therefore, it is vital to have correct trend lines and points spacing for perfect angles.
How to use Trend lines in the Forex trade?
For using the trend lines in the forex market, traders should know how to draw these trend lines. So here we have the steps to draw the trend lines accurately:
- The first step to draw a trend line is to identify the market trend.
- The second step is to take the help of the broker’s trading platforms; traders can go for any reputed broker such as ROInvesting. The trading platform provided by brokers has a slanting line that signals the line tool. Traders can select the trading line tool and use it.
- In an uptrend, traders connect the low point to the next higher low point to draw a line. Traders extend the line to have a projection of the next lows.
- Whereas, in a downtrend, traders connect the high point of the price to the low high point to form a line. Then traders extend the line to have a projection of the future price movements.
- Next, traders choose two three points of higher lows below the price for the uptrend and join them to the line.
- And repeat the same with the downtrend but with the price tops of the lower high above the price and join them.
- One point to remember is that the trend lines work as support and resistance in the forex market.
Using the trendlines in the forex market is easy; traders have to first know about the trading breakouts and trading reversals or bounce backs.
In trend breakouts, traders should wait for the candlesticks to close below the trendline or above it for a perfect decision.
Trend lines are used to identify the trend of the market; when the price retests the trend lines, it gets stronger. When the price is upward and makes higher lows on-trend lines drawn, it indicates a strong uptrend in the market with a signal to buy in the market.
On the other hand, if the price trends downwards with lower highs, it signifies a strong downtrend and a sell signal in the market.
When the trade bounces back:
- The first thing to do is to identify the trend with a long time frame.
- If there’s an uptrend, traders should draw 2-3 uptrend lines connecting the higher swing lows.
- Next, traders have to recognise the price retracements and patiently wait for the price to touch the trend line.
- When the price bounces back off the trend line, traders should place a buy trade when the candlestick closes and touches the trend line in the direction of the market trend.
- Traders place a stop-loss order two to five pips below the low of the candlestick.
- At last, traders can place their profit targets at the previous low swing highs of the chart.
Similarly, traders should deal with the downtrend, using lower highs to draw the lines.
Trading on breakout:
In trade breakouts in the forex market, traders can go for two options:
- Aggressive entry
- Conservative entry
In an aggressive entry, traders enter the market when the breaking candlestick gives traders the confirmation below the trend line for an uptrend. Similarly, when the candlesticks confirm above the trend line, traders should go for a downtrend.
Traders should have good knowledge of candlestick to have timely entry and exit from the market.
Conservative entry needs price retests before entry; when the price breaks the trend line, it may continue or may hand over the break point. In such a situation, traders wait for the price to bounce back after the breakout. Then traders enter the second confirmation of the reversal.
Using this, traders reduce the risk of the trade and false breakouts.
False breakouts are when the price breaks through the trend line and again retests with the candle closing above/ below the trend line. Traders should be aware of the false breakouts and should go for wrong decisions based on the false breakouts.
Conclusion
Trend lines are useful for market analysis and having more confident trade decisions. These are easy to draw and understand with market analysis. Traders can use the trend lines to get a bigger and significant picture of the market. This guides them to make decisions that would benefit them in the future.
However, they may have false breakouts and need three points for validation which is not possible with every trade. So, traders have to be careful while using trendlines.
