Price action traders love to draw them, love to predict the future using them and love to trade by them – yet few know how to properly use them. If you’re anything like me you’ve come to a point in your trading career where you have a hit-and-miss approach when it comes to drawing and trading trend lines.
I have too.
However, throughout my 17 years of trading I’ve continued to remain faithful in being able to master the art of drawing and trading trend lines. In fact, I’ve even created scripts in MetaTrader to help remove any subjectivity in drawing my trend lines.
Why do trend lines fascinate traders?
1. Trend line’s reveal important support and resistance zones of price
For instance, let’s have a look at the following charts that are on different time frames:
As we can see from the snapshot of the horizontal trend line above, on our hourly chart, price is reacting to a support zone. We see that leading to this support zone price was falling and from this small piece of information we can already begin to plan how we would like to trade it: we can be bullish when price nears that price zone again and maintain tight stops further beneath the support zone; or we could wait for the trend line to break and thereby enter short; or we could do both! We could place a BUY limit order above the trend line and then place a stop-and-reverse like order should our reversal LONG order hit our initial stop loss point.
Again we see the same type of set up happening again and again on price charts. This chart above is on a different currency and on a one minute price chart. Yet our trade setup would still be the same.
2. Trend lines have the capacity to tell us where price has been and where it’s likely to go
Sloping trend lines have the ability to show us where price has been and therefore where it’s likely to go. By drawing channels we can encapsulate price and predict where price is likely to oscillate between.
In the price chart above we can see that price struggled to move beyond an established downward sloping trend line and as a result the continued trend prevailed pushing price down through it’s support zones. These types of setups can be used and planned ahead of time – both for entry and exit target prices!
3. Trend lines can even have the capacity to tell us when our event is likely to happen
There can be times where a cluster of trend lines can help to show you when a trading event is likely to happen. These types of events happen whenever we have a combination of trend lines forming what is commonly known as a “wedge” as seen in the following image:
As the upper downward sloping trend line begins to converge with the lower upward sloping trend line price has a tendency to react and jump from out of this pattern – producing valuable trading opportunities. Or, if it doesn’t price has a tendency to move into a consolidation where the trend line trader can range trade or wait for a breakout.
Trend line trading is almost a system and method in itself
So from our two quick summaries we can see that trend line trading provides the capacity of being able to provide an array of information that the astute trader can use to trade against.
From a couple of simple lines we can determine:
- Where price has been
- Where price is likely to go
- Where to get in
- Where to get out
- When to do it
The rest, being money management, is up to you.
So if you haven’t looked at trend line trading you should give it a try. It can help de-clutter your screen helping you to focus primarily on price.