Hello Forex Traders,
What is the difference between horizontal lines and trend lines in forex trading? That was a question I recently received from a member of our trading room. It’s an excellent question and today’s main article topic in fact.
Differences between the horizontal line and the trend line
The first but very obvious difference is the angle of the lines. It is, however, important to state the obvious as to reinforce the concept.
1) A horizontal line has no angle
2) A trend line has an angle which is above 0, but below 90
3) A vertical line has a 90-degree angle
The angle of the trend line can vary from anything just above 0 to 89.99 degrees which is close to a vertical line. But in practical real life situations, trend lines never have 89.99 degrees of course. Anything from 5 to 60 is most common.
The vertical line has no particular use in trending unless used on the charts for remembering a particular time or part of price action. For the remainder of the article, we will, therefore, focus on the trendline and horizontal line.
The validity is another difference between a trend line and a horizontal line. A horizontal line could be placed at any support or resistance level that a Forex trader assesses as important. A trend line, however, must have multiple touches to be considered a valid.
Here is a summary of trend lines and their number of hits:
1) At the minimum there must be 2 hits/touches, otherwise, it has no value.
2) At 3 hits or more is the most valuable as the 3rd hit gives the confirmation of the market respecting the trend line.
3) A trend line with 3 hits or more could also be considered the base of a trend channel.
Horizontal lines also have more importance once price action respects that level multiple times but it is not a prerequisite for validity. A horizontal line that has one price point is a support or resistance. A horizontal line that has multiple points is a potentially a stronger support or resistance and could be the top or bottom of a range.
HORIZONTAL LINE AND TREND LINE TRADING
In theory, both horizontal lines and trend lines can be used for trading breakouts. Trading breakouts have big advantages – primarily because traders avoid lots of moments where price action is indecisive. Price action does tend to consolidate the majority of the time and trading breakouts give the advantage of entering when the market has a higher chance of moving in your favor.
One of the most difficult elements of trading is the psychological perspective: let’s face it, trading is a mental game and implementing one’s trading plan with confidence is crucial. Avoiding long drawn out sideways chop certainly helps that psychological battle. But it also allows for optimal allocation of trading capital. Forex trader who do not have their trading capital “stuck” in chop / sideways movement keep their ability to enter the market with the breakout opportunity of their choice, whereas other might have hit their maximum risk levels.
There is a difference when trading trend lines or horizontal lines. The angle is the primary focal point because there is also a difference between trading shallow trend lines, regular trend lines and steep trend lines.
1) Steep trend lines (more than 40 degrees): price action is moving with a lot of momentum, otherwise the trend line could never be that steep. A break of this line indicates that this big momentum is stopping, but usually, it’s only temporarily. Price usually corrects the angle of the trend before it continues with the trend. In general, these trend lines are great as a trailing stop and are an excellent method of taking a profit upon break.
Some steeper trend line breaks do see a reversal. And trading those to the opposite side are profitable. This is primarily happening when a 4-hour chart is showing a trend and the smaller time frames are moving in a steep correction. A break of that steeper counter trend line has a higher chance of succeeding.
2) Regular trend lines (10-40 degrees): price action is moving at a well-balanced angle but mostly weaker as well. The market is showing exhaustion to one side by price is moving correctively in these cases (as the angle suggests). A break of the trend line indicates the end of that corrective movement.
These trend lines, however, still have plenty of space towards the next bottom or top (support or resistance) and that is the primary reason why the breakout is often less volatile than trend lines with a shallow angle or horizontal trend lines. All breakouts tend to have their ups and downs before a 1 directional price action occurs but regular trend lines are the most “stable” in their breakouts.
The “stable” breakout will lead a good run in one direction before the currency bottoms or tops out on the lower time frames. Therefore using a tighter stop loss has a higher chance of succeeding here than in other examples. At that moment there is a good chance of a hook back or pull back to the price level of the broken trend line. But only after a good size price moment has been made. Both the breakout (strike) and pullback (boomerang) are trade setups which the Winners Edge Trading room employs.
3) Shallow trend lines (0-10 degrees): price action is moving at a weak angle. The market can hardly move away from the top or bottom. The correction is very timid. A break of the trend line also indicates the end of that corrective movement but there is one crucial difference: tops and bottoms (support and resistance) are close by and this could make the breakout short lived before price action respects those levels.
In our trading room, we have a simple solution of making sure that we have an appropriate reward to risk when tackling these trades. This helps take away the subjectivity from the decisions. Remember, always keep your approach to trading as simple as can be.
Due to this lack of space to the next support or resistance, price action often moves choppier than usual. Forex traders are not willing to take a trade right in front of these levels so many up and downs are usually accompanied by this environment. Our trading room also has guidelines on how the breakout should proceed.
4) Horizontal lines (0 degrees): price action has broken the top or bottom, which means that 1 support or resistance is out of the way. However, there are cases when even though 1 support and resistance has been broken, there is another one right above/below it. That could cause the unexpected and sudden (opposite) turnaround.
Often enough the break of the horizontal level is accompanied with lots of volatility and sudden moves up and down. The breakout will see some follow through but often enough this potential is limited as price action wants to hook back to the broken horizontal level. Very frequently the currency actually makes a retracement after this breakout. This retracement could even turn into a full fledge reversal. With horizontal levels, it is safer to trade the 2nd breakout or continuation trade setup, which in fact occurs when a breakout and pullback have already occurred.
Do you recognize the aspects of the horizontal line and trend line yourself drung forex trading? What do you think of trend lines and their angle? Let us know down below!
Have a great weekend and thanks for sharing the article!!