Using trendline analysis, in combination with support and resistance levels as well as indicators, may be one of the simplest and most effective approaches to trading. Let’s see how Forex trendline trading works and its features.
- What are trendlines?
- How can you identify, draw and use trendlines?
- How to apply trading with trendlines
- A simple Forex trendline trading strategy
Interact with the underlined words and green dots to get additional details and explanations.
Explanations and definitions of terms.
What are trendlines?
Trendlines are essentially sloping support and resistance lines. Unlike the usual horizontally oriented support and resistance levels, trendlines incline upwards or downwards.
Rising prices make the low price points higher, which can be connected in an upward-inclined support line that represents a buying market sentiment.
Falling prices make the high price points lower, which can be connected in a downward-inclined resistance line that represents a selling market sentiment.
As a minimum of two dots are required to form a line, a minimum of two lows or two highs are required to indicate a downward or upward trend. However, the more that such points become aligned, the stronger the trend and the more reliable a signal it is.
How can you identify, draw and use trendlines?
Olymp Trade offers various ways to build trendlines for stocks and other assets. All are listed in the Drawing subsection of the Indicators menu, which opens in the left sidebar once you tap the compass icon, as indicated in the image below.
To draw a sloping support line, resistance line or trendline, find the price swing points When you find at least two points, connecting them will make a trendline.
The USD/JPY chart below shows a red downward trendline and a green upward trendline. Both are made by connecting the very tips of the candlestick shadows. Alternatively, a trendline can be made by connecting the lower or upper tips of the candlestick bodies.
How to apply trading with trendlines
Apart from indicating whether a current price trend is going up or down, adjusting and drawing new trendlines for Forex and stocks helps traders see how a trend has changed and may change over time.
If a trendline flattens, the trend will likely move into a channel, which is when the asset price is moving between two parallel trendlines. In this case, traders are advised to use horizontal support and resistance levels to track the range and prepare for a breakout.
If a trendline steepens, it means the observed trend is becoming stronger. In the case of parabolic (extremely steep) increases, the asset price can enter a buying frenzy.
As the market’s factors and sentiment change over various timeframes, traders are advised to be just as flexible and adaptive, adjusting their trendlines and strategies accordingly.
A simple Forex trendline trading strategy
Trendlines can provide market entry and exit signals. Let’s examine how that works with the following simple strategy based on horizontal and sloping trendlines.
According to this strategy, the best trading opportunities appear when the price is near the trendline.
1️⃣ First, find the trend and set a sloping trendline. Then set the horizontal support and resistance levels.
2️⃣ Second, note areas of interest, or important price zones.
Big price movements are possible at points where the sloping trendline and horizontal lines cross.
When the price hits these crossing points, buyers or sellers often push the price in the direction of the trend.
In the screenshot below, USD/JPY went up, reaching both the horizontal level of 105.47 and momentarily touching the trendline at that crossing point. Both signals confirmed an incoming downtrend, so the probability of a downward scenario was much higher in that exact spot 🔽
Trendlines for Forex are a useful tool to simplify your trading. They help find trends, indicate support and resistance levels, and determine key price areas. Armed with technical analysis tools and good money management skills, you can take advantage of analyzing price with trendlines and become a force to be reckoned with on Olymp Trade.Trade with Olymp Trade
Risk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
A support level is a price level above which an asset stays during a given period.
A resistance level is a price level that “resists” further upward price action during a given period.
A swing point is a price point from which a change in the price’s direction occurs on a candlestick chart.