In the world of trading, the trend is the friend of traders (the trend is your friend). In a trend, the market moves in a certain direction illustrating the forex trendline analysis on the trader’s chart and providing very valuable information.
This is very helpful in determining good entries and exits, the best position to take profit, and placing on trend lines.
Drawing and performing trendline analysis correctly is a basic skill for every trader. As with the support and resistance levels, there is a difference of opinion as to which line is working correctly.
The following is the basic and most widely accepted version of trendline analysis.
Definition of Forex Trendline Analysis
The trend line is a straight line that connects the bottom points that rise sequentially in an uptrend, or the top points that fall sequentially in a downtrend.
To create a trend line, at least two price points must be connected. The three main properties of a trend line are:
- The more price points that are connected, the more valid and stronger the trend line will be to hold support or resistance points in the next test.
- The more valid a trend line, the more attention, and obedience by market participants will be.
- The steepness of the trend line can be used as a reference to identify bullish market conditions (if it is steep to the top) and bearish (if it is steep to the bottom).
How to Create a Trendline
To create a trendline, connect at least two price points that are close together.
Then draw the line as long as possible to find out the points of support (in an uptrend) or resistance points (in a downtrend) in the future.
Trendline Accuracy and Trading Time Period
To see the long-term trend, trend lines are drawn on large time frames, usually daily or weekly. As for the medium term, trend lines can be made on 4-hour or daily time frames.
Especially for short-term trading, the 1-hour time frame and below is recommended as the most appropriate chart for making trend lines.
Because of these rules, the time frame for drawing trend lines can be adjusted according to the trading period used.
Long- and medium-term traders (swing traders) often refer to the daily time frame, while short-term traders refer to 5-minutes to 1-hour time frames. However, it should be noted that the determination of the time frame also has an impact on accuracy.
Accuracy means validity, which in this case means the possibility that the trend line is valid and can be adhered to in the future. The noise factor or signal error often occurs in small time frames.
That is why the accuracy of trend lines drawn on small time frames (eg 1-minute) will be very low. The trend line on the 5-minute time frame drawn today is not necessarily valid for two or three days later.
How to Create an Uptrend Line
To create an uptrend line, here are the steps:
- Determine the lowest price point (low level).
- Draw a line to the next lowest price point.
- Extend the line to anticipate the next support (or resistance) points
How to Draw a Downtrend Line
With the same method as the previous trend line, forbear market conditions, a downtrend line can be drawn which anticipates resistance points in the future.
How to Create a Trendline in MetaTrader
Creating trend lines on the trading platform is very easy. Especially for the popular MetaTrader platform, you can go to Insert-Lines-Trendline, or go directly to the toolbar.
So, that was the understanding of what is forex trendline analysis that all beginner forex traders should know.
