We have Shona here with a quick question asking us just to do a quick review of how to draw trend lines, because there seems to be so many different ways to do it and they can sometimes get a little bit confused on which one is correct.
So as always, thanks for the question, Shona. Now looking at trend lines there’s quite a couple of ways, different ways that traders draw these on the charts, but something that that helped me when I just started trading was realizing that a trend line is really nothing more than just a support and resistance zone. Yes, it’s moving diagonally over the chart instead of horizontally, but it’s still just showing you the exact same thing which is a support and resistance area. And that alone should help to some extent for figuring out how to draw them. So let’s take a quick look at some of the most basic elements of drawing trend lines.
A crucial thing to start with is that you usually want to see at least two or three areas where the trend line is confirmed or respected. So the more touches or the more confirmed reactions from a trend line, the more credible or more important the level will be.
Again, just like horizontal support and resistance areas, right, so let’s take this one on the Euro versus the US dollar. We can see that just normal support-resistance area, very interesting because we had resistance first but it came back to act at a support, against support, almost support and now we’ve broken through and now it’s acting as resistance.
So in the same way you’re looking for multiple touches, multiple confirmations for that trend line. So let’s just draw this most recent move to the upside. Let’s see what we can find there. Let’s draw it up maybe to that position. So we can see here multiple touches, right?
So you have support, support, again, support, support, support, another almost support and then again, another support. So very, very high confluence here, lots of reactions from that specific support area. So, always keep in mind that the more touches, the more credibility, the more important the line will be.
Obviously, the higher you go in timeframes, it’ll also change in terms of importance as well. So the more confluence, the more valuable, the more useful the line will be. Now, generally speaking, when you have an upwards moving trend, you would usually want to use your trend line to see where support is sitting at, right? Because you’re expecting the move to the upside, you’re basically looking at possible support areas to try and reengage that trend to the upside.
So it makes sense to draw your upward sloping trend from the swing lows, right? So you want to be, basically look for support for that upward moving slope. And usually when you have a downtrend, or downward sloping move, you’re going to be looking to place it on the highs because you’re going to find areas where we think the market will pull back to, to find resistance, to be able to reengage the pay, of course, to the downside. So keep that in mind in terms of how to draw it.
But having said that, you know, as they are just basically diagonal support and resistance levels, you can also have a trend line for an upward sloping move on the swing highs that basically tracks potential resistance areas again. So just like here we’re looking for support, we can use a topside trendline obviously, in an upward moving slope, but to try and find possible areas where we think the market can react from in terms of profit taking it in.
So let’s try and see how we can draw this one. Maybe from that swing. Maybe that looks okay, so we can see we have a little bit of a channel going on here. And it’s basically the same idea, right?
So we have lots of confluency on this specific level. Lots of touches, so that again, can give us a possible topside target to look for in terms of profit taking again. So it’s really just another way of looking for potential support resistance areas on the charts.
Obviously, like with most technical tools, like normal support and resistance as well, the higher the timeframe, the more significant these levels will be. We highlighted that daily, and that daily trend line on the euro dollar for a couple of sessions now, which acted as a very good barometer for overall market movements.
So if we just extend that one out a little bit, we can see that we had multiple, multiple touches and that is of course the zone where the market has rejected from early last week as well.
So the higher the timeframe, the more significant these levels will be. I think that’s another important factor just to always keep in mind. Now some sometimes, you know, when you draw in trend lines, you might not get them exactly, you know, on the tip of the week or right on the high of the candle or right on the low of the candle. But think of it in terms of support and resistance. It’s usually not, you know, a set by the perp line, it’s usually just a line or a zone in the sand. So just because it’s not a perfect touch like this one over here, just because it’s not perfectly on that line, you can clearly see that that overall trend line did act as resistance.
So don’t think of it as, you know, a hard and fast rule, it needs to be exactly on the lows. I mean, this one over here as well, this is an obvious trend line, but we have that little overflow on the bottom of that trend line in terms of support. So that is going to be something that happens.
And something that you can do as a tip, you know, to try and find the overall trend, so to speak, the overall resistance or the overall support is apart from looking at the wick, sometimes if you have a very volatile pair, you might have a little bit of an overshoot like this one. And if it’s a very tricky pair, you might sometimes be a little bit confused on where to exactly draw it. And the tip that I got when I started trading was actually to take away the wick so just drop down to something like a line graph and see whether you have the overall direction of the trend in place because remember, your line graph won’t have all of the wicks in place, it is only going to track the closes, the candle closes.
So if you go to a line chart here, just to give you an example, you can see the line chart is really a very good indicator of that move to the upside and same with the top side one, even though you had that little bit of overflow to the upside, you had that clear resistance, again, again, again, so very clear way to see the overall trend if there’s a very volatile move in the markets.
So just a quick tip, you know, that can give you a better idea of the overall slope of the trend when compared to a very volatile chart that has lots of wicks. So, Shona, I hope that helps.
Obviously, as we said, you know, try and think of it as just support and resistance levels. It’s really nothing more than that. It’s just diagonally or upward sloping and downward sloping support and resistance areas. Apart from just looking at us as a trend itself with support and resistance, you can also consider drawing it as a channel itself.
So, I mean, for the same reason we can draw something like that, you know, and actually draw it as a channel itself. So there’s many tools that you can use to trade with, obviously looking for that resistance and support.
o, a couple of things you can you can do to, you know, draw it a little bit easier. Any other questions, any other things that you’re confused with please don’t hesitate to let us know.