You can think of a trend line like what happens in the media with celebrities who suddenly become a “trend” that everyone agrees on and follows. In the same way, a trend line in trading is something no two traders usually disagree about, because it is a clear and simple tool for identifying the direction of price movement on a chart.
A trend line is one of the supporting technical analysis tools, but it gains its real value when you connect it with other technical tools. This combination increases its accuracy and usefulness in decision-making.
Uptrend line
• It is an imaginary moving support line (meaning that every time the price touches it, it will be at a different level).
• It is formed from three consecutive lows on the same line. The line is not considered valid until the third point is formed.
• From the third touch of the price with the uptrend line, the signal is considered a valid buy signal.
Downtrend line
• It is an imaginary moving resistance line, meaning that every time the price touches it, it will be at a different level than before.
• It is formed from three consecutive highs on the same line, and it is not considered valid until the third point is formed.
• From the third touch of the price with the downtrend line, the signal is considered a valid sell signal.
How to trade using the trend line
Example: Downtrend line
• When the third point is formed, we wait for a reversal candle or a reversal candlestick pattern to appear, such as the “engulfing candle.”
• We enter a sell trade and place the stop loss above the last high.
• The target is set at the first low that the price encounters during the decline.
• With every touch of the trend line, we can repeat entering a sell trade until the trend line is broken to the upside.
How to trade the trend-line breakout
Whenever prices keep touching the trend line, we continue activating sell trades until the line is broken upward. So how do we trade a trend-line breakout?
In the case of a breakout:
• When prices break above the downtrend line, we have two options:
- Enter a buy trade immediately after the breakout.
- Or wait for the price to retest the broken trend line, then enter a buy trade.
• In this case, the target is set at the first high the price encounters, and the stop loss is placed at the nearest low.
The same rules apply to the uptrend line but in the opposite direction.
The importance of confirmations with the trend line
Although the trend line is considered a strong and simple tool for identifying the general direction of prices, relying on it alone can sometimes lead to false signals, especially in choppy or sideways markets. For this reason, a smart trader needs to look for additional confirmations before entering any trade, in order to increase decision accuracy and reduce risk.
Examples of confirmations:
- Japanese candlestick patterns: such as the engulfing candle or the Pin Bar, as these patterns give a strong indication of a possible price reversal when touching the trend line.
- Support and resistance levels: if the trend line aligns with a major support or resistance level, this greatly increases the reliability of the trade.
- We can combine the trend line from classical technical analysis with ICT concepts: ICT provides liquidity areas from which prices are expected to react upward, such as OB (Order Block) and FVG (Fair Value Gap).
- Technical indicators: such as the Relative Strength Index (RSI) or the MACD, which help identify whether the market is in an overbought or oversold condition.
Trading volume: when a price bounce from the trend line coincides with a noticeable increase in volume, this acts as an additional confirmation of the strength of the signal.
(You can use volume more effectively in stock markets, where trading volume represents real market activity, unlike the Forex market where volume does not reflect the actual total trading volume.)
