What is the Trend Line?
A trend line is a drawing tool on the price chart which is horizontal but sloping.
It is different from horizontal lines in that it has the capability to slope diagonally on the price chart while horizontal lines don’t.
As such, a trend line can be used to draw horizontal price levels, just like horizontal lines.
The trend line can further be used to draw sloping price levels, unlike horizontal lines.
So how does a trend line look like?
An upward trend line is a line that connects several bottoms of the price and slopes upwards from left to right.
On the contrary, a downward trend line is one that connects several price tops and slopes downwards from left to right.
An upward trend line, by connecting price bottoms and still sloping upwards, hints to an uptrend.
A downward trend line, on the other hand, by connecting price tops and still sloping downwards, shows a downtrend.
In this post, I will take you through basic concepts of how the trend line can be used in trading.
Stick around to the end to learn a few new tricks.
Trend Line Trading.
Can you use the trend line, as simple as it is, to make money trading in Olymp Trade?
The answer is a resounding yes, and I am going to show you how.
But before then, do you know how to draw a trend line?
It’s as simple as this:
- Identify major tops or bottoms of the price.
- Pick the trend line tool from the list of indicators.
- Connect at least two tops for a downward trend line or two bottoms for an upward trend line.
- Adjust the trend line to touch as many tops or bottoms as possible.
- Keep adjusting the trend lines as new tops or bottoms form.
Here is how to use the trend line to trade:
Using Trend Line to Identify the Trend Direction.
Identify major price tops and draw a trend line.
Also, identify major price bottoms and draw a trend line.
If the trend line drawn on the price tops is sloping downwards from left to right (downward trend line), then the market is a downtrend.
Remove the trend line on the bottoms.
However, if the trend line drawn on the price bottoms slopes upwards from left to right (upward trend line), then the market is trending upwards.
You should remove the trend line on the tops.
It is the steepness of the trend line which determines the strength of the trend.
A steep upward trend line may mean a strong uptrend while a steep downward trend line may mean a strong downtrend.
Strong uptrends are buy signals while strong downtrends are sell signals.
If the trend line is getting flatter as you adjust it when new tops or bottoms of the price form, it means that the trend is slowing.
The market may be approaching a ranging condition and you can therefore adjust your trading technique in that line.
Trend Line Plus Support and Resistance.
The best trading opportunities are when several factors back up a trading signal.
That is to mean that combining a trend line with a support or resistance level is a great idea as far as the accuracy of the signal is concerned.
Say for example an upward trend line coincides with a support level.
The price then, from above, hits that point where the support level cuts the upward trend line.
It will be a very strong up signal if the price forms a bullish candlestick at that point such as the bullish pin bar, hammer, bullish engulfing, or any other.
On the contrary, say a downward trend line coincides with a resistance.
The price then, from below, hits that point where the resistance level cuts the downward trend line.
It will be a very strong down signal if the price forms a bearish candlestick at that point such as the bearish pin bar, hanging man, bearish engulfing, or any other.
Trend Line Breakout Trading.
Trend line breakout trading involves handling pullbacks.
Pullbacks are temporary reverses in the primary trend before such initial trend resumes.
Say for example the market posts higher highs and lows and is thus an uptrend.
A pullback will be when you notice the price reversing downwards minus making a whole different trend.
To trade a trend line breakout, draw a trend line along the highs of the pullback.
You will wait for an upward breakout above the trend line then trade up.
A market that forms lower highs and lows is a downtrend.
A pullback will be when the price reverses upwards.
Draw a trend line along the lows of the pullback and trade down if the price breaks out of the trend line downwards.
Using Trend Line to Ride huge Trends.
This technique involves using the trend line to trail your stop loss.
An upward trend line which connects the bottoms of the price means that the market is on an uptrend.
On the contrary, a downward trend line that connects the tops of the price means that the market is on a downtrend.
If the upward trend line is steep enough, you should trade up.
You should then observe your trade to exit when the price breaks the upward trend line downwards by closing below it.
On the other hand, if the downward trend line is steep enough, you should trade down.
You need to observe the trade to exit when the price breaks the downward trend line upwards by closing above it.
Using Trend Line to Identify Trend Reversals.
The price breaking above a downward trend line does not necessarily mean that the downtrend will reverse upwards.
Similarly, the price breaking below an upward trend line does not necessarily mean a downward price reversal.
To resort to an upward price reversal, after the price breaks above a downward trend line, you must wait for it to form a higher low.
The price must then rallies upwards to break above the swing high preceding the higher low.
To conclude a downward price reversal, after the price breaks below an upward trend line, you must wait for it to form a lower high.
The price must then rally downwards to break the swing low preceding the lower high.