Trend lines

Post on: 1 Май, 2015 No Comment

Trend line rules

Rule #2. A top is called a Swing High and consists of a minimum of 5 candles:

in the middle — 1 candle with the highest price

on each side — 2 candles with lower prices

A bottom is called a Swing Low. also consists of 5 candles:

1 mid candle — the lowest one

2 candle on each side of it which prices that don’t exceed the lowest point.

Let’s find all Tops and Bottoms that fall under this rule:

If at the top 2 highest candles or at the bottom 2 lowest candles are equal in price, then as per rules we can’t officially call them a Swing High or Swing Low, but these are still equally meaningful Support/Resistance levels, and therefore should be used for drawing trend lines when necessary.

If you need help with finding tops and bottoms, use Fractals indicator. which will find every single top and bottom for you.

Rule #3. Uptrend trend lines are drawn below the price by connecting price bottoms (Swing Low).

Downtrend trend lines are drawn above the price by connecting tops (Swing High).

Rule #4. Avoid drawing too steep trend lines as they will rarely be of any use.

In addition, if such trend line is crossing any of the price bars, it’s a wrong trend line to draw.

(Notice that crossing the body of the candlestick is not allowed, while crossing the shadows is acceptable and, in fact, will be found in many instances).

Rule #5. The more tops and bottoms are connected — the stronger the trend line becomes.

Some traders won’t recognize a trend line as valid until there has been at least 3 points connected.

A trader usually draws a trend line through the first 2 points and when the line is tested at point #3 — it either confirms (validates) the trend line or breaks it (invalidates).

Rule #6. Besides major trend lines, there could be minor trend lines

When the market starts to accelerate, the angle of a trend will increase. In such case the major trend line will hold the main trend, while the new minor (inner) trend lines will help to track the latest price development.

Rule #7. Any trend line sooner or later will be broken.

A trend line is nothing else but support/resistance line. We know that when support level is broken it automatically transforms into resistance level. Same rule applies to trend lines.

When a trend line is broken, it should stay on the chart for some time, as we’ll be expecting a retest of the line in the nearest future: this retest of a broken trend line is an excellent opportunity for opening a new trade.

You won’t always see such ideal retests of a broken trend line, sometimes there will be a shorter pullback to the broken line without reaching it. Nevertheless, this is a common pattern every trader should be able to recognize.

Rule #8. Trend lines can be flat = horizontal.

They don’t necessarily have to have an angle. This occurs when we have 2 equal (or nearly equal) tops or bottoms (known as Double tops & double bottoms).

On our chart we don’t have ideal double top/bottom patterns, but we can learn a few things from horizontal S/R levels:

Any horizontal S/R level is rather an area, not exact price. Imagine that you have a marker instead of a sharp pencil, and with this marker you’re drawing S/R levels. Now you’ll discover that a few spikes through the S/R levels is not an indication of a broken S/R level, but rather a test. The true break comes when price slices through the level without fear usually with a tall definitive candlestick.

Rule #9. Trend lines are used to build price channels.

First you need to draw a regular trend line, and then copy it to create a parallel symmetrical line on the other side of the price channel.

While you continue trading with the main trend line, a channel helps to project profit targets.

We’ll talk more about channels when we discuss Median lines and Andrew’s Pitchfork.

Rule #10. Different traders will draw different trend lines while looking at the same chart, which sends the message that the lines you draw might differ from lines drawn by other Forex market participants.

The goal is to have the same trend lines as majority would do — this helps to trade with the majority, which is much easier. To achieve that goal focus on the most obvious trend lines (those that everyone would most likely notice and draw), and try to avoid least obvious ones.

Rule #11.

While some Forex traders prefer drawing trend lines using price shadows, the others would ignore the shadows, and instead use only candlestick bodies (line chart example).

To see what this mean, try the following:

1. Switch your chart to the Line chart. Then draw a trend line.

2. Now switch your chart back to the Candlestick chart. notice that your trend line is not using candlestick shadows. Some traders believe that this is the correct way of drawing trend lines (because actual price Open and Close values are more important than intermediate fluctuations), while others disagree, because the shadows reflect actual price peaks and valleys which have own value.