How to Draw Trend Lines and Channels on Forex Charts
Sometimes support & resistances are formed diagonally in a similar way like a staircase. This forms a Forex trend which is a sustained movement in one direction either upward or downwards.
A forex trend line depicts the points of support & resistance for the price, depending on the direction of the FX market. For an upward moving forex market trend - trend line will shows the points of support and for a downward moving forex market trend - trend line will show the areas of resistance - Forex trend lines are mainly used by many traders to determine these resistance and support levels on forex charts.
A Forex Trend line is a slanting straight line that connects two or more price points and then extends into the future to act as a level of support or resistance. There are two types of forex trend lines: upward forex trend line and downward forex trend line. Forex trend line is an aspect of Forex trading technical analysis that uses forex line studies to try and predict where the next price move will head to. A trader must know how to draw & interpret signals generated by this trend line tool.
The basis of this forex technical analysis is based upon the idea that forex markets move in trends. Forex trend lines are used to show 3 things.
- The general direction of the market - up or down.
- The strength of the current forex trend - and
- Where future support & resistance will be likely located
If forex trend lines forms in a certain direction then the forex market usually moves in that direction for a period of time until a time when this forex trend line is broken.
Drawing these trendlines on a forex chart shows the general trend of the forex market which can either be upwards or downwards.
Shown Below is an example of how to draw these trend lines on forex charts
Guide:How to Draw Upwards Forex Trendline and Trade Upward Forex Trend Move
Course: How to Draw Forex Downward Trendline and Trade Downward Forex Trend Move
The MT4 trading software provides forex charting tools for drawing these trend lines on forex charts. To draw forex trend lines onto a forex chart, forex traders can use the forex tools provided on the MT4 software that is shown below.
To draw forex trendlines on a forex chart just click the Forex MT4 Draw Trendline Tools as shown above on the MT4 platform technical analysis software and select point A where you want to start plotting the trendline & then point B where you want the trend line to touch. You can also right click in trend line and on the properties option choose the option to extend the ray by ticking the 'ray check box', if you don't want to extend the trend-line, then uncheck this option in your MT4 Forex platform. You can also change other forex trend line properties such as color and width on this property popup window of the trend line properties. You can download MT4 software and learn forex trend-line technical analysis with it.
The trend is your friend. Is a popular saying among traders because you should never go against it. This is the most reliable method to trade Forex because once currencies start to move in one direction they can move in that particular direction for quite some time - therefore using this trend trading technique presents opportunity to make profits from the forex market.
Principles of How to Draw Forex Trading Trend-Lines
Use candlestick charts
- The points used to draw the trendline are along the lows of the price bars in a rising forex market. An upwards bullish forex trend move is defined by higher highs & higher lows.
- The points used to plot the trend line are along the highs of the price bars in a falling market. A downward bearish forex trend move is defined by lower highs & lower lows.
- The points used to draw forex trend lines are extremes points - the high or the low price. These extremes are important because a close beyond the extreme tells investors the forex trend of the currency pair might be changing. This is an entry or an exit signal.
- The more often a forex trendline is hit but it is not broken, the more powerful its trading signal.
There are two main ways of trading this forex trend-line technical analysis setup:
- The Trendline Bounce - Forex Trendline Bounce
- The Trendline Break - Forex Trendline Break
Technical Analysis Methods of Forex Trend Lines
The forex trendline bounce is a continuation forex signal where price bounces off this trend line to continue moving in the same direction. In a downward forex trend, the market will bounce downward after hitting this trend line level which is the resistance level. In an upward forex trend, the market will bounce upwards after hitting this trend line level which is the support level.
The forex trend-line break is a reversal signal where the market goes through the trend line and starts moving in the opposite direction. When a forex up trend is broken then the sentiment of the forex market reverses and becomes bearish and when a forex down trend is broken then the forex market sentiment reverses & becomes bullish.
For very strong forex trends, after this forex trend-line break signal, the price will consolidate for some time before heading in the opposite direction. For short term forex trends then this trendline break forex signal will mean price may reverse immediately.
In forex trading, both the trend line bounce and the trendline break that are used in technical analysis charts are based upon these trend line levels being support & resistance areas.
Entry, Exit & Setting stops:
This forex trend line trading method is used to determine good entry and exit points, protective stops are placed just above or below these trend lines. The forex trend line bounce is a low-risk entry method used by traders to place entry trades after price has retraced. Forex trades are setup along these trend line levels and a stop loss placed just above or below these trend lines.
The forex trendline break is a crucial technical indicator of possible Forex trend reversal. When the trend line is broken the price starts move in the opposite direction. This provides an early exit signal for forex traders to exit their open trades and take profits. When there a penetration of these trend line levels, it's a signal that the forex price can begin heading in opposite direction.
Unlike other forex technical analysis indicators there is no formula used to calculate the trend line, this trend line formation is just plotted between two chart points on the forex chart.
