Lesson 18 – Forex Trend Lines & Channels, what are they?
As you may have already noticed in your demo account, or your live account in case you have already started trading, the market does not move in perfect lines or curves.
It is always fluctuating and oscillating, creating new peak and troughs constantly.
Trend lines for forex traders
For this reason, we learn to draw trend lines on a chart so we can simplify what is happening in the price action so we can have a better chance at predicting the new support and resistance zones.
Trend lines are the simplest, most common and most used form of technically analysis that you will see forex traders use. They are simple but very effective.
The most common trend lines we draw on our charts will be on the uptrends and downtrends in the market, that way we easily summarize and visualise the trend.
How to draw a trend line?
This is pretty simple .All you need to do is find at least two major tops and two major bottoms and connect the two points.
It really is that simple.
Drawing an Uptrend line
For an uptrend, we draw the trend line underneath the price action structure along the two or more previous lows. This is where we observe the price rebounding upwards and will serve as an indicator for the price action to do the same in the near future.
Drawing a Downtrend line
In a downtrend, we draw the trend line on top of the price action structure, connecting the peaks of the price action. We will assume the price will rebound from this line again as the price moves upwards.
Not all trend lines are equal
They key skill when using trend lines is knowing the validity of each trend line. Just because you;ve connected two dots on the graph does not mean it will be the obvious level of support or resistance.
In fact, the consensus is that the trend line is not valid until the same line is hit at least 3 times.
Here are three simple laws to keep in mind when evaluating your trend lines:
- The more times the trend line is hit (tested) and does not get overstepped, the more valid it becomes. In other words, it gets stronger every time it resists the price action.
- You need at least two clear tops or bottoms to draw the minimum valid trend line, but this is the weakest possible trend line. It is best to wait for three connecting highs or lows before drawing a trend line.
- The more horizontal these trend lines are, the stronger they tend to be. Trend lines with a high gradient are usually unlikely to hold their level very well and indicate a very volatile market.
Apart from the three main laws, here is an extra tip:
Do not force trend lines onto your chart when you don’t find good ones. People tend to draw lines to support their theories instead of vice versa. The lines should objectively fit into the graph according to the three laws. If you try to force a line, its very likely not going to serve as good information.
A trend is your friend
I have already mentioned this very tacky saying at least once in this course, but its worth hammering in. The trend really is your friend.
Many novice forex traders will often predict the future movements in the market by going against the trend. As they try to find opportunity by going against the grain, thinking that as trading is a zero sum game, they might take advantage of everyone going in the same direction.
However, due to the giant size of the forex market, it really is most profitable to simple go with the flow, follow the crowd, and use the momentum of all other traders if you want to be successful.
Typically, new traders will see the market rise and rise and will assume that this trend is doomed to break sooner or later. If it goes up, it must come down right?
Well yes, you’d be right.
However, it is nearly impossible to accurately and predictably predict when to pick the point of reversal.
Thats is the precise reason these traders never perform well and this is the reason that the majority of traders lose money.
On the other hand, if you copy what is already there, the premise of your prediction is already confirmed. There is a trend and you will be riding in the direction of the trend.
Experience shows that it is much easier to make a profit by taking advantage of a current market trend then trying ot predict a new one. Why make things harder for yourself if you don’t have to.
Once this is understood, the next skill to master is what to do during a trade, when to cash out and when to hold. We will go into depth on this in the mindset part of the course.
Channels for forex traders
When drawing a trend line, we are simply drawing one line either connecting the highs or the lows to identify an uptrend or a downtrend.
To make a channel, we draw teo lines for the same trend, essentially connecting all the highs as well as all the lows. They will act as the upper and lower trend lines with the price action between them.
These upper and lower trend lines show the market support and resistance zones.
We use channels to gain good perspective on what the market structure is and it will show us logical points to enter and exit our trades.
Thes can be some of the simplest and easiest trading setups you’ll find. The trick is finding them.
Do note that a channel is only valid when the lines are very parallel to one another. Most brokers software will help you draw these lines and confirm this.