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Trend Lines & Trends

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Chapter 5

Trend Lines & Trends

 

5.1 Trend /Trend Line

When the market is making higher highs and higher lows that means the market is trending up; this means the market is bullish or in other words continuous rise in prices in one direction creates a bullish trend.

When the market is making lower lows and lower highs that means the market is trending down; this means the market is bearish or in other words continuous fall in prices in one direction creates a bearish trend.

Keep in mind that a good amount of pips can be won in both bullish and bearish trending markets.

Someone said, “Tell us whether the market is trending up or trending down?”

The answer was “Now that depends on what time frame are you talking about…”

 

So depending on your trading personality you have to pick a time frame to trade. If the market is trending then you shall check whether the market is bullish or bearish.

You don’t have to use sophisticated tools to check the trend.

Just a general eyeballing the chart shall give you enough clue whether the market is trending up or down.

 

Always trade with the trend, if you are not crazy to capture every single move of the market.

 

Coming back to higher highs and higher lows; as described earlier, how do you find the recent Highest High point—from the current market price start taking your steps towards the candles to the left and start climbing candles till you reach your first candle that has touched the highest price with 2 candles to the left and 2 candles to the right with their highest prices still lower than this candle you have found with highest price. Similarily further moving left, when you reach your candle that has touched the lowest price with 2 candles to the left and 2 candles to the right with their lowest prices still higher than this candle you have found with lowest price is your higher low..

 

Now let us see in figure below what is higher highs (HH) and higher lows(HL). The market is clearly trending up as long as the next higher low is higher than the previous higher low and is confirmed by the next higher high being higher than the previous higher high.

Your intent shall be to catch this pattern in forthcoming price movement

 

(Sourced from www.Tradingview.com)

 

 

Trend Line-

 

A line drawn by joining the highest high points during the fall of prices depicts the bearish trend.

Similarly, a line drawn by joining the lowest low points during rising prices depicts the bullish trend.

See the examples below

 

The bullish trend--

(Sourced from www.Tradingview.com)

 

 

 

 

 

 

The bearish trend—

(Sourced from www.Tradingview.com)

 

 

Please note that there are 2 schools of thoughts for drawing trendlines. In both cases draw by starting from first 2 highest high or first 2 lowest low points & run it through. First thought is that 3rd point of touch confirms the trendline is valid. Second thought that draw by starting first 2 highest high or first 2 lowest low points & run it through no further adjustment is needed. I have stated it separately covering both thought processes and beyond.

 

 

 

 

A trend is a trend; the price will respect the trend and will keep going under (bearish) or over (bullish) until it decides to change its path & once the market decided to reverse then the pair price will cross over the trendline. According to the first school of thought, 3rd touchpoint is required. This is explained further in “Multi-point touch trendline”. But the “confirmation” word according to this thought suggests that we shall not call trendline a trendline if the 3rd point does not confirm; which is quite not right as a trend whether big or small a trend is still a trend unless the market is steady or also called in consolidation. This is further explained below in section “Drawing and Reading Trend as Prices Move”.

Trend is a function of time and volume. That is why a sudden increase in the volume of trade in the existing trend will provide a strong indication of the trend. Similarly, a sudden increase in the volume of trade opposite in direction of the existing trend will provide a strong indication of trend reversal or at least slow down of existing trend.

 

 

5.2 Multi-point Touch Trend line & How to Draw

 

Multi-point Touch Bullish Trend Line & Bearish Trend Line

A line defining the bearish or bullish trend that has multiple touchpoints. This might be approximation of best fit line at the highest highs during bearish trend or lowest lows during bullish trend. It may not represent the lowest or highest price point of the pair but is a fair representation of market emotions for the price of the pair providing a potential indication of price reversal. Hence at the same token, these trend lines act as good support or resistance levels as well.

 

 

 

 

How to Draw Multi-point Touch Bullish Trend Line

See below GBPNZD at Daily Chart. Compress the chart. Now run a straight line that approximately best fits the lowest recent prices starting from the lowest price point. Do not compress the chart that you cannot read. Compress the chart only to the extent of what you can read and analyze.

See below fig (A) The bullish pair has made multiple attempts to touch / approximately touch bullish trend line that means this trend line acts as support level. After rising if price again falls back then again there is a potential trendline to act as a barrier and might support the price to rise back. Also note at the close to 21st Dec the bearish candle broke the trendline indicating potential reversal of the trend. Accordingly, trade entries, stop loss and profit targets can be set.

Fig (A)

(Sourced from www.Tradingview.com)

 

 

 

 

How to Draw Multi-point Touch Bearish Trend Line

See below GBPNZD at Daily Chart. Compress the chart. Now run a straight line that approximately best fits the Highest recent prices starting from the Highest price point. Do not compress the chart that you cannot read. Compress the chart only to the extent of what you can read and analyze.

See below fig (B) The bearish pair has made multiple attempts to touch / approximately touch bearish trend line that means this trend line acts as support level. After the next drop if price rises again then there is a potential trendline to act as a barrier and might act as resistance making the price to fall back. Also note that the bullish candle broke the trendline indicating potential reversal of the trend. Accordingly, trade entries, stop loss and profit targets can be set.

 

(Sourced from www.Tradingview.com)

 

5.3 Reversal Point Touch Trendline & How to Draw

 

Finding recent Lowest Low or Highest High point

 

For support, how do you find the recent Lowest low point—from the current market price start taking your steps towards the candles to the left and start descending with candles till you reach your first candle that has touched the lowest price with 2 candles to the left and 2 candles to the right with their lowest prices still higher than this candle you have found with lowest price. This is your first level of support and similarly, you will find multiple levels of support on your chart at whatever time frame you are working. Always go left when you want to analyze your chart. Higher time frames tend to be more accurate to reflect price levels and lower time frame tend to provide more market noise.

 

Reversal Point Touch Trendline

I call reversal points as the deepest or highest points on the chart. Highest support and resistance points are the Correct points from where you start drawing your trend lines. Reversal point touch trendline is the true representation of the trend. This line touches the reversal points at the highest highs during bearish trend or lowest lows during bullish trend.

This means that the trend line shall be exactly touching the candle body at the center point of top or bottom of the candle, (when no wick or tail is present for the candle, you can see it clearly when you zoom in to see closeup of the candlestick) or exactly touching the reversal candlewick or tail end. It always represents the lowest or highest price point of the pair & is an accurate representation of market emotions for the price of the pair providing a higher potential indication of price reversal. Hence at the same token, these trend lines act as good support or resistance levels as well.

 

 

How to Draw Reversal Point Touch Trendline

Compress the chart to a readable level and go for the highest and deepest price points. Once again you might think, if you compress more you will find many such points. Don’t worry, only go for the recent highest high, for bearish trending & lowest low on the chart for bullish trending. Too much compressing will certainly give you valid deepest or highest points on chart that for sure such R/S will be respected and remembered by market but based on your trading style, you might not be able to recall why reversal happened; so compress chart to extent that is readable to you for trading and finding your deepest or highest points on chart.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.4 Bullish Trend

Bullish trendline-- Join first 2 lowest lows and extend the line for the upward rise of the line, this will be bullish trend line. You must keep in mind to join the lowest low those appeared only BEFORE the highest high. Extend this line to the end of the screen or extend this line till it crosses all candles in its way to check whether the trend line is broken. Always remember, its also mentioned million times in the past, whenever the market is making higher high and higher low then its called market is in bullish trend. if the market forms a higher high higher than the previous high then it has the tendency to keep going higher thus forming a bullish trend.

 

(Sourced from www.Tradingview.com)

 

 

 

 

5.5 Bearish Trend

Bearish trendline--Now join first 2 highest highs and extend the line for the downward slope of the line, this will be bearish trend line. You must keep in mind to join the highest high those appeared only BEFORE the lowest low. Extend this line to the end of the screen or extend this line till it crosses all candles in its way. Why? It gives you clear direction on whether the trend line is broken. Always remember, whenever the market is making a lower low and lower high then its called market is in bearish trend. if the market forms a lower low that is lower than the previous low then it has the tendency to keep going lower thus forming a bearish trend.

 

(Sourced from www.Tradingview.com)

 

The trendline break confirmation is usually a clear indication of the reversal of the trend from bearish to bullish and vice-versa.

 

 

Drawing & Reading Trend As Prices Move--

But the trendlines we have drawn recently are called “Overall Trend” trendlines. As the market price is moving we shall 2 things-

  • Move the trendline to align with the current market structure.

That means the joining first 2 successive highest high or lowest low point points will only give you a frozen trendline which is of no use if not validated with current market structure.

Its already specified but let me remind you from previous text for bearish trend-- Must keep in mind to join the highest high those appeared only BEFORE the lowest low. Extend this line to the end of the screen or extend this line till it crosses all candles in its way.

(Sourced from www.Tradingview.com)

 

 

 

 

  • Draw “Current Trend” trendline.

Draw a fresh new trendline from the last touch of the overall trendline in the aggressive direction of the trend in the same fashion using the same principles. This is called the current trend line. Both overall trendline and current trendline are shown below in fig.

Why? As a matter of fact the after breaking the Current Trend trendline prices always tend to move from “Current Trend” trendline to “Overall Trend” trendline.

Fig--Overall trendline and Current trendline

(Sourced from www.Tradingview.com)

See the figures attached here and also watch video for this chapter for how to draw trendlines on www.surplusforex.com

 

 

 

 

Note-

A swing trader will enter the maket long in up-trend & believes that the prices will continue to make higher highs & higher lows and will again make higher highs those are higher than the previous high to continue the uptrend. That is why this formation is called completing the up-swing means high to low to higher high.

A swing trader will enter the maket short in down-trend & believes that the prices will continue to make lower lows & lower highs and will again make lower lows those are lower than the previous low to continue the downtrend . That is why this formation is called completing the down-swing means low to high to lower low.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.6 Counter Trend Line

 

Counter Trend Line is the trend line that is drawn against or counter to the exiting “Overall Trend”, whenever price displays retracement a counter trendline is drawn with at least 3 or more candles in retracement.

Counter Trendline gives you a good entry point for the trade. Once a candle in direction of overall trend crosses the counter trendline & closes on the other side of counter-trendline is a fairly good indication that prices will continue to move in direction of the overall trend. In my experience, during strong trends, the extension of prices in the direction of the overall trend is at least equal to the size of the candle that crossed over the counter trendline.

 

(Sourced from www.Tradingview.com)

 

 

5.7 Consolidation

Some time bulls and bears display equal strength so the market either moves in a range or market is very slow/sluggish then the market is called in consolidation. Below is a good example of market consolidation. As seen on 1 HR USDJPY, here the market is range bound and moving only within 40 PIPs for days.

Other consolidation including Triangles and Wedges are explained in detail in Chapter “Trend & Pattern Recognition”.

(Sourced from www.Tradingview.com)

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