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SIDEWAYS TREND

Trendlines are considered one of the most common forms of technical analysis, they are used to visually represent the direction in which price has been travelling. 

A trendline is a line drawn between two levels on a chart that have acted at some point in the past as a support or resistance level, also known as turning points.

 

The more times price respects a particular trendline, the more significant that trendline becomes.

 

As the price heads back towards a trendline, it becomes a traders decision as to whether the trendline will hold and price will bounce off of it, or whether a trendline will break and price will continue in its current direction.

 

There are various different ways to draw trendlines, for example, you can draw a trendline from the highs/lows of price or from the closing prices. There is no right or wrong way. However, whatever approach you do decide to use, you must be consistent in using this approach as to avoid mixed signals.

 

 

Just like support and resistance levels there are two main categories of trendlines; major and minor.

 

Major trendlines show a level as to where prices have trended on a longer-term basis. These are typically found on a chart with higher time-frames, such as daily, weekly and monthly.

 

Minor trendlines show a level as to where prices have trended on a shorter-term basis. These are typically found on a chart with lower time-frames, such as 15 minutes, 1 hour and 4 hours. Therefore, minor trendlines are found within major trendlines.

 

 

There are two main types of trends that trendlines are associated with;

  1. Downtrend
  2. Uptrend

 

A downtrend typically occurs when a series of two to three bars have lower highs and lower lows.

A downtrend occurs when the sellers of a currency pair are pushing the price, also known as a bearish day.

When drawing a trendline for a downtrend, you would draw the trendline ABOVE the price on a chart.

 

DOWNTREND

 

Conversely, an uptrend typically occurs when a series of two to three bars have higher highs and higher lows.

An uptrend occurs when the buyers of a currency pair are pushing the price, also known as a bullish day.

When drawing a trendline for an uptrend, you would draw the trendline BELOW the price on a chart.

 

UPTREND

 

 

How do you draw trendlines?

Step 1

Check in which direction the price has been trending. We would recommend viewing price in a candlestick chart when doing this, to get a gauge or where the uptrends and downtrends are.

The best way to do this is by just looking at the candlestick chart with a naked eye.

Circle key turning points on your chart, where candles have higher lows or lower highs.

Step 2

Draw a trendline either below key turning points if price is in an uptrend, or above key turning points if price is in a downtrend.

We would recommend viewing price in a line chart when plotting your trendlines. This is because by plotting the trendlines along the closing prices, you will typically be tighter to the trend meaning you will receive signals a lot sooner than if you were to draw your trendline on a candlestick chart.

LESSON SUMMARY:

– Trendlines are considered one of the most common forms of technical analysis, they are used to visually represent the direction in which price has been travelling.

– A trendline is a line drawn between two levels on a chart that have acted at some point in the past as a support or resistance level, also known as turning points.

– Just like support and resistance levels there are two main categories of trendlines; major and minor.

– A downtrend typically occurs when a series of two to three bars have lower highs and lower lows. When drawing a trendline for a downtrend, you would draw the trendline ABOVE the price on a chart.

– An uptrend typically occurs when a series of two to three bars have higher highs and higher lows. When drawing a trendline for an uptrend, you would draw the trendline BELOW the price on a chart.

Lesson tags: free forex course
Back to: Free Forex Course > Step 7 - Technical Indicators
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