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Forex Knowledge: How to Draw Trendlines in Forex?

Dave

New member
An important aspect of Forex knowledge is uptrends and downtrends that traders use to confirm that the underlying market conditions are favorable to their position.

In trading, one of the most useful and versatile tools that show these trends is the trendline. Trendlines can be used in swing trading, day trading, and position trading. Trendlines are used to identify the levels on a chart beyond which the price of an asset will have a difficult time moving. This information can be leveraged by traders who seek strategic entry levels and for managing risk effectively by identifying areas where they can place their stop-loss orders.

They are used to give indications as to the immediate trend and indicate when a trend has changed. They can also be used as support and resistance and provide opportunities to open and close positions.

Strengthen your Forex knowledge


Trendlines are lines on charts that connect a set of prices together. The resulting line gives traders an indication of where an investment value is headed. Knowing how to draw trendlines in Forex and understanding an underlying trend’s direction are crucial aspects of Forex knowledge and trading success. Accurate trendlines boost the chances of a successful trade by ensuring the market forces are in your favor.

Before knowing how to draw trendlines, it is important to understand the basic terminologies related to trendlines. These can help strengthen your Forex knowledge.

Downtrend and uptrend - Downward sloping lines indicate that the supply is in excess, which means market participants are more willing to sell than buy an asset. If you see the downward sloping trendline in the chart, avoid a long position. An uptrend shows there is a greater demand for an asset than the supply. The uptrend is used to show that the price will continue to head upward.

Support and resistance - While trendlines are simple tools that help assess an asset’s general direction an asset, they are also used to predict support and resistance. Support is the area in the chart that shows potential buying pressure while resistance is the area with potential selling pressure.

How to draw trendlines?


It is best to draw the trendlines by hand manually rather than depending on the trendline indicator that plots the line. These auto trendline indicators are not reliable, although they draw the lines.

The first step to drawing a trendline is identifying a trend in the chart by using a daily chart put up at the EUR USD forum. Without a trendline, it is hard to visually identify a trend on the chart. Draw a line on the chart that goes along with the trend. Draw the lines at an angle either below or above the price. When you are drawing trendlines for a downtrend, ensure the lines are drawn above the price. If drawing in an uptrend, the trendlines come below the price. The highs in a downtrend, as well as the lows in the uptrend, determine the trendline.

Japanese candlestick bar is used to draw trendlines. Every Japanese candlestick bar has five elements of the body, bottom, and top of the body, lower and upper candlewicks.

For a bullish trendline, you have to spot lower candlewicks and body bottoms on the EUR USD forum chart. While you can use candlewicks for the trendline, the candle body can also be used when there are volatility spikes that occur out of the sloping trendline’s normal range.

When drawing trendlines, at least two points are needed. An ideal situation is when you can connect two bottoms or tops together at a minimum. The more the number of connected bottoms or tops, the stronger is your trendline. In other words, the more the number of times the price connects with the trendline, the better the validity of the trendline. This indicates more traders are using them either as resistance or support.

To confirm or validate a trend, however, you will need three points at a minimum on the same line where the two points lie.

Remember not to think that the trend is in a single line. The trend is an area and not a single line. Now that you have updated your Forex knowledge with a stepwise guide to drawing trendlines, you can go ahead and craft your trading success.
 
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