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How to Use Trend Lines in Forex? Best Trading
Guide 2021
fxreviews.best/blog/how-to-use-trend-lines-in-fore
x
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?
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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?
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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 representati
on 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 t echnical 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.
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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
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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.
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The second step is to take the help of the
brokers trading platforms traders can go for
any reputed broker such as . 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 theres 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.
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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
c andlestick 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.
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