Okay, let’s have a quick recap from last week: when we draw trendlines, we draw downward trendlines connecting swing high peaks and we draw upward trendlines connecting swing low troughs. Let’s go back to the EUR/USD one hour chart that we left off with last time:
The trendlines that are shown here in blue are major trendlines, in that they reflect a strong overall trend lasted many hours to many days. But we can add additional trendlines that reflect some of the smaller up-and-down moves. Here’s the same chart with a few additional lines drawn on it:
Now when price broke through the first major downtrend line on the left, we had about 22 hours of trending to the upside, a part of which is reflected on minor trend line “A”. When the second bear candle closed breaking through line “A”, we had about 30 pips of downward trending, represented by trend line “B”. This would be a good point to note that trendlines of this type tend to be more reliable the closer they are to being horizontal, but in this case line “B” held stoutly for several hours until it was penetrated the trend to the upside, represented by trend line “C”. Ultimately there is a breakout through line “C”, as well as the major blue trend line, followed by a nice drop of 30 pips to the downside. Now you’ll notice that when I draw these, I’m usually looking for a sharp spike either to the upside or downside to connect to another similar spike. Trendlines drawn in this matter tend to be more reliable, and, as you will come to notice, they will be more respected by price action.
Now here’s another interesting thing you can do with this type of trend line drawing: looking again at the chart above, on the right side you’ll see a minor blue trend line which intersects with the major upward blue trend line, forming a sort of “trap”. Now the major uptrend line was still holding, so technically the market overall the still in an uptrend (at least according to the trendlines we have drawn here). The price action was also respecting the minor trend line to the downside. Where the lines intersect often forms a sort of “decision point” that helps to identify whether or not the minor downtrend will breakthrough the major uptrend or vice versa. Pretty neat, huh? So when you see this sort of set up, you might want to wait to see which way the market will go before jumping in; be prepared to go long or short, depending upon which trend line gets violated. Please bear in mind, we’ve only begun to scratch the surface of the subject of drawing trendlines, and these are just a few ideas regarding how you can use them to help with price action analysis in your own trading activities. Remember, that you should always filter your analysis using other tools (moving averages, oscillators, or other price action analysis) to strengthen your forecasting to make it more reliable. Here’s a quick tip: a good way to identify major trendlines is to draw them on higher timeframe charts, and then switch the chart to a lower timeframe looking for entries. Check out the following chart:
Above is a four hour chart for USD/CHF. Price action is moving down, and I drew a trend line from the swing high peaks. Okay, now I’m going to switch to the one hour time frame on this chart below:
The down trend purple line at the top is the trend line from the four hour chart, and, no surprise, it gets respected and there’s no breakout (yet). Because I opened this up to the one hour time frame, I can draw some more minor down trendlines, and, in this case, I’ve ended up drawing a channel through which price is moving downward very nicely. This is useful as it would be desirable to jump into a short position while price action is close to the upper trend line. Jumping in on the wrong side of the channel in this example would result in 40 pips of drawdown – ouch! Just another angle on how this flavor of trend line can demonstrate some interesting interaction with price movement. Take a few moments and practice drawings more trendlines – I think you’ll find it interesting!
I do plan on continuing this dialogue on trendlines in upcoming articles, but in the meantime, I hope you are planning, that is, if you haven’t already done so, to draw a line that points to signing up for Sapphire membership in the Slick Trade Academy! If you have been contemplating membership, why not sign up and give it a try? A great opportunity to learn Forex while getting some hands-on experience with trading, receiving trade signals, accessing expert advisors, great strategies, help and insight from other traders just like you and more! Don’t delay! Sign up today!
That’s all for now – next time I’m going to share with you some (hopefully) interesting ideas involving trend trading with the Foltron strategy (and its expert advisor counterpart). Until then good luck in the market, and, as always, thanks for reading! JC