A trend line is drawn on your chart to help predict the general direction of price. They can also help you to spot reversals. On the chart below the green line is a trend line.
Trend lines can also help to determine good entry and exit points, as well as where to place your stop loss.
Woah! That is a lot of use out of a simple line, isn’t it?
Well, not really. They are quite good but, like any form of analysis, if used alone they won’t make you any pips. They do make a great addition to your trading arsenal though!
The main problem with trend lines is placing them on your chart. At first, it can be a little intimidating but it is quite easy to get the hang of. In this section, you’ll learn how to place a trend line on your charts, and utilize them to make some pips!
There are two main types of trend lines: bullish and bearish.
A bullish trend line has a positive slope and is formed by connecting two or more low points. The second swing low point must be higher than the first swing low. Check out the example:
A bearish trend line is formed by connecting two or more high points. The second swing high must be lower than the first swing high.
So placing lines is pretty easy. All you need to do is:
There you have it! You now have a trend line on your chart. But wait a second newbie. Even though you can place a trend line based on two swing low/high points, the trend line remains unconfirmed until it is hit a third time.
Once a trend line has been placed and it encounters a third bounce, it becomes active. Now the price should find support or resistance at your trend line. It should struggle to break through the line. If the price does break the line it usually means the trend is over.
Trend lines can be placed on all time frames but they are more effective on longer time frames. Also, the longer a trend line is active, the stronger it gets!