A trend line may be simplistic, but it plays a vital role in finding winning trades

by , 05 November 2015

Trends play a big part in trading. You shouldn't consider putting a trade on unless you know what the prevailing trend is.

The old adage, the trend is your friend, holds true. You should trade with the trend, it a profitable way of trading.

This is where trend lines come in…


The importance of a trend line

 
Trend lines are at the very heart of technical analysis. Making money using technical analysis comes from finding a trend, getting a trade on and holding on until the charts tell you it’s time to get out.
 
Markets tend to move in trends. This goes for the forex market, shares and indexes. By using a trend line, you can work out the overriding direction of the price.
 
There are three main types of trends:
 
  1. Uptrends, which come from a chain of higher highs and higher lows.
  2. Downtrends, which come from a chain of lower highs and lower lows.
  3. Sideways trends, which come the market or price doesn’t trend upwards or downwards.
 

How to draw a trend line

 
Trend lines are straight lines drawn onto a price chart. They connect the top or the bottom limits of a price, showing you the overall trend in play.
 
For a trend line you need at least two tops or bottoms. The more touches you get on a trend line, the stronger and more significant the trend line is.
 
If the price breaks through the trend line, it’s time to sit up and take notice. This is a sign that things are changing.
 
For example, in an uptrend, if the price breaks below the trend line, it could continue to fall as sellers gain the upper hand.
 
You can use trend lines to find potential trades and as a warning sign that it may be time to exit your position.
 
So there you have it. Why a trend line may be simplistic, but plays a vital role in finding winning trades.
 
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