5 Trading Basic Tips to Do Your First Trend Line
One of the fundamental technical analysis tools available to seasoned traders is the trend line. By using trend lines you can find about the potential reaction points on a price chart. Although drawing trend lines seems easy at first, it can become challenging if you not applying the right methodology. Following tips will help you to identify proper entry points by drawing trend lines.
Look at the angle first
What goes around comes around. If price went up fast it will also retrace down fast! When price had a steep rally and your trend line starts to look more like an elevator shaft instead of a staircase then you are not doing it right. A reliable trend line will have 35 to 50 degree angle, give or take few degrees. But if your upward sloping trend line has a 20 degree angle (approximately of course) then that one will not last long.
Understand difference between up and down trend
On an uptrend you need to connect the lows and on a downtrend you need to connect the high of the price. Do not confuse trend lines with equidistant channels. That is another beast by its own right! So when you have identified an uptrend, try to find as many lows that lines up and when you have identified a downtrend, try to find as many highs that lines down (pun intended).
Connect two points but wait for the third touch
Novice traders and forex brokers will often connect to price points, draw the trend line and blindly put a buy or sell limit order around the trend line. Some of the so called “professional” traders will put a “touch reversal stop” order. Means they will wait for the price to reach the trend line then buy when price is bounced on the way up and vice-versa.
However, remember that when it only takes two price points to draw a trend line, you need to wait for price to touch your trend line for the third time before using it to enter the market! Hence, once price has confirmed that it is respecting the trend line by bouncing from it on the third try, you should only place orders when price is about to test your trend line for the fourth time.
More the merrier and longer the better
Try to connect as many price points with your trend line as possible. Even if the trend line has several penetration. On longer time frames, you can find more than five or six places where price bounced from the trend line. Those are the most reliable trend lines to profit from. On shorter time frames, it is hard to find that kind of consistency. Simply because price fluctuates with chaotic moves. Obviously, a trend line on the daily chart will be much more reliable compared to a trend line on the five minute chart because it will take more orders and longer time to form a trend line. So try to use higher time frames when drawing trend lines.
A trend line is a zone
In a perfect world, trend lines will give you exact price points where price will come and reverse in the original direction of the trend. However, we don’t live in a perfect world! Often you will find that price penetrated your trend line, sometimes even closed above or below the line then resumed the trend.
The remedy is that you need to treat trend lines as a zone instead of a single line. Just because price crossed the trend line does not mean that the trend has changed!