A Comprehensive Guide to Trend Lines Strategy

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A Comprehensive Guide to Trend Lines Strategy

As a binary options trader, you would often hear about various trade tools and techniques that are part of the trading game when it comes to forex and binary options trade markets. In order to excel and be successful in this highly competitive and volatile trade niche, you have to stay abreast of the recent developments and trends. A lot of traders make the common error of overlooking the significance of these trade strategies and applications, however, you absolutely need to master them in order to interpret the market analytics, technical charts etc. One of the most commonly used techniques to make calculated trade decisions is the use of ‘trend lines’ (sometimes called, trend-line analysis).

What are Trend Lines?

It is important to understand trend lines from the very fundamental aspects. In simple terms, trend lines are one of the commonly used and most widespread market analysis techniques. However, the fact that it is labelled as a common technique does not mean that it is lesser in importance or that it is the easiest of all. As a matter of fact, trend lines analysis happen to be one of the most effective and important techniques when it comes to making winning binary options trade decisions.

It is important to understand how to actually draw the trade lines and once you do that, you can really focus on interpreting them. For instance if you observe an uptrend (also known as a bullish trend) you would look for the lowest point and draw a line that should cross the low that is next high; you would then extend this line to the end of time-frame of interest. On the other hand, upon observing a downward-trend (bearish) you would do the same process in opposite trend directions. After completing the trend line drawing, you may analyze any possible outer or inner trends. Therefore, to be proficient in understanding and interpreting trend lines is paramount for the overall success in binary options market segment.

What Makes Trend Lines so Powerful?

Trend lines analysis is employed to make everyday trading decision and is used frequently by a majority of traders in order to formulate the diagnostic opinions about various market patterns. By simply incorporating the insights from a comprehensive trend lines analysis, the traders no longer need to look for other market trend indicators (although, triangulating from multiple sources never hurts!).

Trend lines are not only powerful tools but are also quite easy to master and then put to use; they reveal price trends that are moving higher along less down-turn or downward trends that indicate price movements towards lower side along a less up-turn. If you can interpret what trend lines analysis is depicting, you can conveniently identify various price trends in the chart. It is this depth and breadth of trend-line analysis that makes it all the more powerful and a very critical component of conducting market analysis in the binary options market.

Few Insights from Trend Line Interpretation

Interpreting a trend line holds importance because it helps identify the prevalent market sentiment and that is very critical because when you merge it with other technical indicators, they may very well indicate a consistently strong market trend. This information comes handy when you are in the process of making a decision about which direction to place your binary options trade; certainly, you should follow a strong trend direction. However, a stronger market sentiment may also indicate an upcoming reversal in market trends. It is advisable to place the trade by making use of short time-frames along a strong sentiment in market.

An important thing to understand about trend lines is that they aren’t primarily an exclusive indicators, instead they function more as a markers that outline the boundary of a traders’ decisions in accordance with the prevailing market conditions. Therefore, a comprehensive trend line analysis is paramount to gaining in-depth insights about potential movements of price.

Another important source of insight is the trend line formation itself. For example an outward trend serves more of a boundary for the price that a trend would have a tough time to break. A lot of traders see an inner trend as one of the promising indicators or a good sign, denoting that the sentiment and overall momentum may change at a specific time in dynamic conditions. In essence, trend line types (i.e. inner vs. outward) would enable you to pinpoint the most suitable price for the next binary options trading move.

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How to Incorporate Trend Lines Strategy to Your Trading?

Trend lines are crowned as a strong identifier of price movements and this makes them very important in binary options trade market. Moreover, they are also significant when you are interested in spotting over-sold and under-sold conditions. As a rule of thumb, always remember that you must call trades when observing an over-sold market trend and place trades in an under-sold market trend.

In order to make use of the trend line strategy, you must understand the key concepts of resistance and support lines. Support lines are concerned with a line that is going through the low-ends of price extremities, while resistance lines are crossing through the up-trends of such price movements. A support line denotes that movement of a price below that specific level wouldn’t happen, however, for the resistance line the interpretation is concerned with less likelihood of a price moving beyond the cust off mark. The space between support and resistance lines have been termed as ‘price channel’ and usually market price stays within this area. Therefore, it is a wise strategy to call options when price movement is getting nearer to support line and go for trade options when the price movement is near the resistance line.

In conclusion, even though the trend lines strategic analysis appear to be overly simplistic, it holds great potential and plays a critical role towards the success of trading decisions on a daily basis.

Here are few more articles, to sharpen up your binary options analytic skills…

Have you been using trend line analysis in your binary options trade decisions? Share with us your experience, challenges or any tips regarding trend line strategy in the comments below…

Comprehensive Guide to Trendline Trading

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The most important use case for technical analysis is identifying uptrends and downtrends. Trend lines are tools that help traders successfully recognize trends. This article will help you to learn how to use this tool and will improve your chances of making a successful trade.

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Drawing a Trendline

Trend lines are usually drawn on the charts by connecting the lows in an upward trend and the highs during a downward trend. There are different approaches to drawing trend lines, but the outlined approach offers a robust charting methodology.

A confirmed trend line normally requires at least three contact points with the price. We can always connect any two random points on the charts, but the trend line is an active trend line only if we have a third contact point. In addition, we must ensure our trend line does not excessively cut through the candlesticks.

Trend lines that go through candlestick bodies should be avoided, whereas a trend line passing through candlestick shadows may be OK under specific circumstances. It is not always possible to describe a trend with a trend line and if the chart does not offer one, we should not force it.

The trend in the figure below allows us to draw a trend line by connecting the lows. The trend line is confirmed on the third contact point and the fourth contact point provides another confirmation signal. Trend lines are used by traders to find trends and reversals alike.

Trend traders look for subsequent bounces to enter trades into the trend direction. The contact point 4 in the figure below shows such an example. Reversal traders wait for a confirmed breakout through the trend lines, anticipating a change in trend direction.

As already mentioned, the slope of the trend waves indicates whether a trend is gaining or losing strength. The so-called bump-and-run formation comprises two parts: The trend progresses moderately in the initial phase, namely the lead-in phase. If the trend intensifies and the price moves away from the previous trend line, the bump phase is reached. It is well known that trends can lose their sustainability quickly if the price rises too fast.

This mechanism builds the foundation for the bump-and-run formation. If we see a significant increase in the angles of trend lines, we should be careful. The signal for a trend reversal and the run phase can be noticed when the price breaks the steeper trend line or when the price forms a new low as shown in the below figure.

The other trend line signal is given when trends with low or declining angles form on your charts. If the price moves slowly in one direction and the angle is extremely flat, this may indicate that market players do not fully support the trend and the ratio between buyers and sellers is more balanced. This prevents the price from rising or falling faster. Wedges are an example of this phenomenon as we have seen previously.

The left trend line in the below figure shows a scenario wherein the upward trend rises only slowly with a small angle. This indicates that although the buyers are in control, the buying interest does not significantly predominate. A slight shift can cause a trend reversal when the selling interest absorbs all the buying interest.

The break of the trend line confirms that the direction changes. The subsequent downward trend shows how flattening trend lines can point to the end of a trend as well. The sellers are gradually losing the upper hand and the ratio between the buyers and the sellers is becoming more and more balanced. This characteristic also builds the foundation of the wedge pattern

If two or more formations, patterns or signals such as wedges, candlestick patterns, and trend lines occur together, the signal force of different concepts is combined. This is called confluence in technical analysis. The signal strength of a trading situation normally increases when more confluence factors are combined.

When analyzing chart patterns, combining individual candlestick patterns with broader chart formations has proven to be helpful.

An example of this is a rejection or engulfing candlestick at the end of a double low – the spring pattern. As already mentioned, technical analysis works, among other things, because millions of market players use it and it leads to a self-fulfilling prophecy.

Not every trader will follow the Head-and-shoulders formation or use trend lines or candlestick patterns, but if several patterns and signals are clubbed together, more traders will become aware of them and then draw the same conclusions, increasing the probability of a successful trading opportunity.

Trend line breaks

A powerful trading signal is generated when an active trend line is broken. This often foreshadows a change in the trend direction and it confirms a shift in the market structure. The below figure shows various confirmed trend lines with more than three contact points in each case.

A break of a trend line always initiates a new trend. Interestingly, every break of a trend line is preceded by a change in the highs and lows first. When the price breaks a trend line during an upward trend, we can often notice how the trend has already formed lower highs. The break of the trend line is then the final signal, whereupon the trend reversal is initiated.

Traders can get into trouble quickly because it is not always obvious how a trend line can be drawn. If there are uncertainties in the correct application of the trend lines, it is advisable to combine them with horizontal breakouts. This makes trading more objective.

Thus, do not trade at the first signal when the price breaks the trend line, but only when the price subsequently forms a new low or high as well. These signals usually occur in quick succession, and hence the trader does not have to wait too long for his/her signal, but can nevertheless improve the quality of his/her trading and, at the same time, integrate another confluence factor into his/her trading.

Types of Trend Lines

There can be many variations of trend lines and it is important to understand the types of trend lines before you start using them

  • Standard Trendline

Standard uptrend lines are drawn between higher lows in an uptrend; the standard downtrend line is a line drawn between lower highs in a downtrend.

The uptrend line shows where buyers have stepped in on the declines with more demand and have bid the market higher, which is why this line is called the demand line. In a downtrend, the downtrend line, or the supply line, shows where more sellers have come into the market to arrest the bounces.

  • Parallel Trendline

The purpose of the parallel trend line is to create a trend channel that shows the range of fluctuations that the market has accepted as normal. In general, if you are long in an uptrend and prices rise to the upper parallel trend line, it probably makes sense to be slightly defensive and to take some profits.

  • Supplement Trendline

In general, the strength of a trend line depends on the swing points used to define the line. However, there are some special cases where very short-term trend lines without good swings may give good trading signals. At some point in your development as trader, you may find that these small trend lines offer some interesting opportunities for precisely timing entries.

Conclusion

Trend Lines are an important tool for traders to analyze the market and find probable uptrends and downtrends. Trendlines can be helpful for traders to gauge areas of support and resistance and help to determine whether the trend will continue. Always remember that trend lines can also be used with different patterns and indicators to be sure whether the trend will continue to grow and increase the chances of profitability of the trader.

The Complete Guide to Trend Line Trading

Last Updated on November 20, 2020

Trend Line is one of the most versatile tools in trading.

However, most traders get it wrong.

They draw Trend Lines looking like this…

I know I’m exaggerating, but you get my point.

That’s why in today’s post, you’ll learn:

Or if you prefer, you can watch this training below…

What is a Trend Line and how does it work

You know Support and Resistance are horizontal areas on your chart that shows potential buying/selling pressure.

And it’s the same for Trend Line.

The only difference is… a Trend Line isn’t horizontal but sloping.

Here’s a Trend Line example:

So here’s my definition of it:

Upward Trend Line: “Sloping” area on the chart that shows upward buying pressure.

Downward Trend Line: “Sloping” area on the chart that shows downward selling pressure.

Now before I dive into specific Trend Line strategies and techniques, you must first learn how to draw a Trend Line correctly.

And that’s what I’ll cover next.

How to Draw a Trend Line correctly

First, let’s learn how NOT to draw your Trend Line.

Here’s a bad example:

Clearly, this is garbage.

How do you know which Trend Lines are important? And which to ignore?

So listen carefully:

Here’s how to draw a Trend Line correctly…

  1. Focus only on the major swing points and ignore everything else
  2. Connect at least 2 major swing points
  3. Adjust it so that you get the most number of touches (whether it’s body or wick)

Here’s a Trend Line example:

Pro Tip:

You can draw 2 parallel Trend Line to define the area on your chart.

Here’s an example…

Unlike Support and Resistance where you can just draw once and leave it, Trend Line needs “adjustment”.

This happens when the price breaks the Trend Line and then recovers — and you need to “adjust” the Trend Line to fit the recent price action.

You’ll learn how Trend Lines can improve your trading results…

How to use Trend Line to identify the direction of the trend — and tell when the market condition has changed

All you need to do is draw your Trend Line and ask yourself…

“Is the Trend Line pointing higher or lower?”

If it’s higher, then the market is in an uptrend (and vice versa).

But that’s not all.

Because a Trend Line can also alert you when market conditions are changing.

By paying attention to the steepness of the Trend Line.

If your Trend Line is getting flatter, it means the market is moving into a range condition.

And if your Trend Line is getting steeper, it means the trend is becoming stronger (or possibly going into a buying climax).

Is this important?

Because if you know market conditions are changing, you can adjust your trading strategy accordingly.

And not use the same “trick” for all market conditions — which is a recipe for disaster.

Trend Line Trading: How to better time your entries

If you want to find good trading opportunities, then you must trade near the Trend Line.

This allows you to have a tighter stop loss on your trades — which improves your risk to reward.

But that’s not all…

Because if you combine Trend Line with Support and Resistance, that’s where you find the best trading opportunities.

Here’s what I mean…

Now you might wonder:

“So when do I enter a trade?”

Well, you can use reversal candlestick patterns (like the Hammer, Bullish Engulfing, etc.) as your entry trigger.

This means you’re only entering a trade when the market has “bounced off” the Trend Line and likely to move higher.

Here’s an example:

This is powerful stuff, right?

The Trend Line Breakout Strategy

It can be difficult to time your entries in a trending market because the pullback can be deep or shallow.

If the pullback is deep and you enter your trades too early, you have to suffer a lot of “pain”.

But if the pullback is shallow and you enter your trades too late, you risk missing the move.

So, what’s the solution?

Introducing The Trend Line Breakout technique.

Here’s how it works…

  1. Wait for a pullback in an uptrend
  2. Draw a Trend Line connecting the highs of the pullback
  3. If the price breaks the Trend Line, then enter the trade

Here’s an example:

Here’s the logic behind it…

If the price breaks above the Trend Line, it tells you the buyers are in control and the trend is likely to resume.

If it doesn’t, then it means the sellers are still in control and you want to stay on the sidelines till the buyers regained control.

Does it make sense?

  1. Draw an upward Trend Line
  2. Trail your stop loss below the Trend Line
  3. Exit the trade if the price closes below the Trend Line

Here’s an example…

This technique won’t work well when the trend goes parabolic because you risk giving back a lot of open profits.

“How do I know when a trend is parabolic?”

Here are 2 things to watch for…

  1. The trend lines get steeper (almost like a straight line)
  2. The range of the candles get larger

If #1 and #2 occurs, then the market is likely to be in a parabolic move.

And in such cases, you want to trail your stop loss on the current market swing and exit the trade if the price closes below it.

Here’s an example…

How to use Trend Line and identify trend reversal

Has this ever happen to you?

You see, the price break above the downward Trend Line and you think to yourself…

“The market is about to reverse higher because the Trend Line is broken.”

The next thing you know, the market heads lower, and the downtrend resumes itself.

Wtf, what’s going on?

Well here’s the deal:

Just because a Trend Line breaks doesn’t mean the trend is over.

You’ve learned that a Trend Line needs regular “adjustment” as the market tends to have such a false breakdown.

So the question is…

How do you identify a trend reversal (to the upside)?

Well, here’s a 3-step technique you can use…

  1. Wait for the price to break above the Trend Line
  2. Wait for a higher low to form (this tells you the sellers have exhausted themselves)
  3. If the price breaks the swing high, the market is likely to reverse higher (the buyers are now in control)

Here’s an example…

Now if you want to learn more, go read this post… How to Identify Trend Reversals without any Indicators

Conclusion

So here’s what you’ve learned:

  • When you draw a Trend Line: 1) Focus on the major swing points 2) Connect the major swing points 3) Adjust the Trend Line and get as many touches as possible
  • The steepness of a Trend Line gives you clues about the market condition so you can adjust your trading strategy accordingly
  • The Trend Line Breakout technique helps you time your entry in a trending market
  • You can use a Trend Line to trail your stop loss and ride massive trends
  • If a Trend Line breaks, wait for the re-test and see if it holds. If it does, the market is likely to reverse in the opposite direction.

Now over to you…

How do you use Trend Line in your trading?

Leave a comment below and share your thoughts with me.

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