One of the most common forms oftechnical analysis is the use of trend lines, but are you drawing them correctly?If not, I'm going to show you how.
Now, as we all know there's a vast arrayof different forms of technical analysis that we can when we're analyzing themarket when making our trading decisions.
But by far, the most commonform,widely used is that of support and resistance; that we've discussed in ourprevious video.
And today's topic which is trend line.
Everywhere you look,it's all about trend lines.
You hear it on all our financial news channels; onthe analytical reports that we read on a daily basis.
We often hearing about trendline support broken the trend line resistance and so forth.
So I certainly think it's important that you educate yourself on the subject trendlines to know exactly what it is that they are talking about.
But before we getinto the nuts and bolts, I want to define what a trend line is.
Now, trend line is aline drawn between two levels on a chart that have acted at some point in thepast as support or resistance turning points.
Now, the more times price respectsa particular trend line the more significant that trend line becomes, andas the price does test and challenge these trend lines that becomes ourdecision type.
Will it hold and bounce off or will it break out of course?That's the million dollar question,of course.
And we'll talk about that in abit more detail; in a few minutes.
The whole topic just on its own.
But what Ifound over the years of trading is certainly teaching is that there's a lotof confusion on exactly how and where to draw the trend lines in the first place.
Indeed, this is not an exact science! There are two schools of thought here.
Doyou draw the trend line from the highs and the lows of a particular candle ordo you take them from the closing price? Now, personally I like to take them fromthe closing price.
There's no hard and fast rule.
There's no right answer.
Youcan either do one or the other, but that's the point.
You've got to beconsistent in your approach.
Now, there's no good in taking a trend line from thehigher one candle through the closing price of another candle, just to draw thetrend line to fit into what really isn't there.
It's more likely it's going to pull out some inaccurate trading signals.
So what isimportant is that whether you take it from the highs and the lows or from theclosing place, you've got to be consistent in your approach.
Now, we're goingto get out onthe charts and I'll show you exactly how I caught my trend lines, and then more importantly or as importantly I'll show you how I use themas well in my training.
Come on, here we go! Okay, so the first thing we need to beaware of and when we're plotting trend lines is the direction of the trend.
Andthe clearest way to identify the direction of the trend is by using youreyes.
So where price has been to where it is going.
You see here in this exampleprice is down here.
We're making a series of higher lows this is an up trendingmarket so we're going to be placing a trend line below where the price is.
Anuptrending market, the trend line will be low therefore acting as support.
If themarket is trending down, then we'll have the trendline placed above where themarket price is.
Therefore acting as resistance on the way down.
So as I saidthere's basically two schools of thought in determining where to place your trendline.
Now, the first school of thought is that you can place them on the extremepoints – the highs and the lows of a particular candle, determined by thewicks.
So, in this case you could plot a trend line going something like that soyou're looking at this wick here.
The only problem in doing that is that youoften find that the price is quite a way away from where that particular trendline is drawn.
That's going to be the same if you're plotting a downtrendin market If you're taking the wicks, we'll take this wick from here to thatwick there.
And that would be your descending trend line.
Now, the approachthat I like to take is to use the closing price, and the best way to dothat is by using the line graph.
So here is the line graph.
Now I'm going to usethe same chart, I'm going to plot my my trend lines in using the swing lowsand the swing highs on the line chart.
And what you'll see here is that priceis going to be trading much much closer and trend liners.
So now, going backto the candlestick, you'll see that the orange line that's using the line graphshows you price action much much closer to the trend line.
Now I thought I couldsay there's two main advantages by using the closing price or the lying offapproach enjoying your trend lines.
Frst of all, if you're looking to trade thebreakout trade, that's basically meaning a break of the trend line to go in theopposite direction using the line graph approach will get you into the breakoutmuch much sooner because the price is much more attune to that trend line.
You'll see here on the orange line here, that was a line graph approach you getinto that breakout to the downside much quicker than if you were to use the bluetrend line approach which is on the wicks.
Second thing, is if you're usingthe trend lines for dynamic support and resistance levels, then the price is muchmuch more attune to that trend line giving you many more opportunities for abounce off that trend line for the trend to continue in the direction of that.
Asopposed to using the wick approach or that the extreme approach where price isoften far away from where that trend line is.
And as with support andresistance, trend lines can also be either major or minor.
Now, the majortrend lines are going to be found on the higher time frame chart.
So, for examplehere we've got the pound against the Japanese yen on the daily char.
You canclearly see here that this is an uptrend.
So we can pop in a trend line showing usthis trend to the upside.
We extend this out to where it's been as well.
You seethat that's been respected there in the past.
This is a major trend line, so thismay act as support if it does indeed get down there in the sessions ahea.
Now,with inside major trends you can have minor trends.
So for example here we'vegot a minor downtrend going on.
the major uptrend.
So you can have minortrends inside major trends.
It's worth noting which environment you are in-either major trend or a minor trend.
Another way that some traders look atthe trend lines is to draw channels so they'll have an upper trend line and alower trend line to form a channel to give an indication of potential pricereversals from above and below support and resistance in a trending market.
Sothat is a trend line channe.
Ok so whether your trend line trader, whetheryou love it or whether you don't have much time for it; whatever camp you in, Ihope you enjoyed the video and found it informative.
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Com Till the next video ! Happy trading and goodbye!.