Trend Lines


As you known, whenever price changes, there will be chances to make money in forex market. Price change tends to make trends (up or down). Therefore, determining a trend is most basic idea that any trader need to know.


trend is friend

My name is TREND and I am your firend


Tecnically, a trend line is defined by a series of higher lows (for uptrend) or lower highs (for downtrend) of candlesticks. We need at least three points to establish a trend line but it's better to have more points to make the trend reliable. The price tends to retrace once it touchs the trend line, except when the the trend line is broken (of course).




There are three types of trend lines: Uptrend, Downtrend and Sideways Trend (Trendless or Ranging). Uptrend is presented by a upward line, downtrend is presented by a downward line. Some consider that a sideways trend is actually not a trend on its own since this kind of trend is much more difficult to identify, hence should avoid to trade. So, we only carry out uptrend and downtrend here.


Trend line has fractal nature itself. Smaller trend lines (minor trends) forms larger trend line (major trend) and larger trend line contains smaller trend lines within itself.


How to draw trend line correctly?


The trend line is defined by at least three points of higher lows or lower highs on the candlestick chart. It's a bit different from the support and resistance level, which can be determined by just two points, because these two points have another condition that must be on the same level. Another things is the trend line is not an absolute line, it's a narrow band that contains all the touched points. Followings are steps to draw the trend line:


If you see two higher lows or two lower highs of candlesticks on the chart, you can find a potential trend line by connecting them.


- But remember that it's just "potential", not a confirmed one yet. You have to keep watching the chart's movement until there is another higher low or lower high appeared around the potential trend line.


- Then, try to draw a narrow band that can go through all these higher lows or lower highs, but can not go through any candlestick's body. This band is considered as the trend line from now.


     draw a trend line


draw a trend line



How reliable (or strong) is a trend line?


Just like everything on earth, trend line will not last forever. We should measure its reliability. The reliability of a trend line is recognized by some signs:


- The more times the trend line is touched, the more reliable the trend line.


- The less sloping the trend line, the more reliable the trend line.


- The firmer retracement from the trend line, the more reliable the trend line.


- The longer timeframe the trend line is formed in, the more reliable the trend line (major trend is better than minor trend).


How to trade the trend lines?


Principle of trading trend lines is similar to trading the support and resistance levels. Once price hits the trend line, we have two choices of trading: follow the trend or trade breakout.


Follow the trend


The trend is like a stairs that lead us up or down. What we should to do is step follow the stairs. Practically, if it's uptrend, you should place buy entry; If it's downtrend, you should place a sell entry.


It's better if you wait for the touching candlestick closed at the same side of the trend direction. Or if you feel the trend is reliable, you can anticipate the touched point and set a limit entry there. A stop loss can be set below the last low point (for uptrend) or above the last high point (for downtrend) in order to control your loss if price fail to retrace and break the trend. A take profit can be set at a suitable loss/profit ratio (e.g., 1 loss : 1 profit) or just waiting for the price to have another reverse signal again and exit the trade manually. It's better to set these stop loss at a support or resistance level. Look at this example:

follow the trend


Trade breakout


Whenever the trend line is broken by the price, we may plan to trade breakout. If a candlestick clearly penetrated the trend line, which mean it is completely closed beyond the trend line, we would say that it broke the trend line (this candlestick is called breakout candlestick). Therefore, you should sell if price breaks an uptrend and buy if price breaks an downtrend.


The penetrating candlestick closed beyond the trend line is a good signal to enter trade. Another wisely way is put a stop entry below (for uptrend) or above (for downtrend) the predictable break point. You can set a stop loss at last top (for uptrend) or last bottom (for downtrend) of the trend in the case price can't break the trend and return. A take profit can be set at a suitable loss/profit ratio (e.g., 1 loss : 1 profit) or just waiting for the price to have another reverse signal again then exit the trade manually. Here is an example:

trend breakout

But market is not always easy to play. It's likely to find the chance to play you back. You don't want to get trapped by market's tricks, huh? So, beware of fakeout like this:

trend fakeout

The breakout signal is more reliable if the breakout candlestick is a firm and solid candlestick. An obvious distance from the closing point to the trend line will make the breakout more reliable. If the closing point is too near the trend line, wait for the next candlestick to confirm.


But beware of too far distance because market might be exhaused after a too strong breakout candlestick and no one know what will happen afterward. Sometime, price returns to the trend right after a too fast breakout and it's also considered as a kind of fakeout (you can see a clear fakeout if switch to a longer timeframe). Look at this case:


trend fakeout




Now, you have known why trend is your friend. Let's note down some most important things:


- Draw a reliable trend line by connecting at least three higher lows or lower highs of candlesticks with a narrow band.


- Measuring the reliability of the trend line to plan trading it.


- It possible to follow the trend if either touching candlestick closed at the same side of the trend direction or using a limit order.


It possible to trade breakout if either touching candlestick closed at the counter side of the trend direction or using a stop order.