There are important tricks and tips to remember while using a trend line. You may also consider reading the introduction to technical analysis and price action trading.
What is a trend line and how to draw a valid trend line in chart?
If we have simplify the complex price movements in a market , we can see that there are only three states in price movements.
- Bullish trend
- Bearish trend
- Consolidation period or No trend.
So to find these trends there are different methods. One of the easiest way is to use a trend line. In our DLS method, trend line will be very useful to find the D (Direction) part of price movement.
Definition of a trend line
A trend line a line with a positive or negative slopes which is a reference line of price support or reversal. A bullish trend line supports the price moves at particular points and a bearish trend line rejects or resists the price back to down trend.
A valid trend line must have at least three points connected in the line of slope.
A bullish trend line
You can see there are three points of connection on the line. First two times the price gets support from trend line and rises with bullish engulfing candle. Third point, it rises with pin bar.
A bearish trend line
Here you can see price gets rejected many times from the bearish trend line.
Important points when you use a trend line.
1 : Always draw the trend line from left to right with a slope.
Trends ride in slopes. Always draw a bullish trend line with a positive slope and a bearish trend line with a negative slope.
2 : Do not trust in lines which are parallel to the main trend line
Even though price shows tendency to keep in channel, do not trust the upper line in a bullish channel or lower line in bearish channel. In other words, do not draw a trend line connecting the high points in an up trend or low points in a bearish trend.
3 : Use minor trend lines to find out the jump from the trend line
Use a minor trend line during consolidation period of a major trend. Most probably price will rise after making a triangle pattern, and from the connecting point of major trend.
4 : Keep yourself away from consolidation period
If you are not a long-term trader, exit from the possible high point of a trend and wait for bounce from major trend to enter again. This is to avoid keeping your money locked in during a consolidation period.
If you are a long-term player, always use weekly or monthly charts to draw trend lines. Do not exit your valuable positions by just considering the daily price movements. Personally I do exit my stocks once it breaks the weekly trend.
6 : What happens when price breaks the trend line?
Once the bullish or bearish trend line breaks, always consider it as the price movement is entering a consolidation period. It does not confirm an opposite trend. If you are a day trader or trading in very small time frames like 15 minutes to 1 hour, consider it to go for swing trading.
7 : Are you a short-term or Intraday swing trader? Then, use two points of connection in trend line and go for swings!
Yes, in short time frames, with proper risk reward ratio and price action set ups, you can use the trend lines to enter in swing trades.
8 : Combine Price action with trend lines
Always use support and resistance level combined with trend line. You can go for trades by analyzing the price action setups and patterns at the key levels.
9 : Use Renko chart to understand the trend lines better
Renko is a great tool to identify the trend direction and to draw trend lines. It will help you to judge the price movement in a better way and conclude the trade call.
10 : Exit the trade when trend line is broken.
Yes, it is better to exit the running trade when the trend line is broken by the price. Wait for next price action set up to re enter or reverse the trade.
11 : There can be false breakouts!!
If it a false break, the price will go back to original trend within next one or two candles. So keep the Stop loss below the false breakout.
12 : Wait for price action candles when the price approaches the trend line
You can see price react to trend line as it does with support and resistance levels. So wait for a pin bar or engulfing candle to enter a trend.
Trend lines are very useful and simplest tool every trader must user. Forex or stock trader, these are the basic tool to use in a chart.