Trend Lines as Support and Resistance
Drawing a trend line is the simplest thing to do. At least this is the common thinking when coming to drawing a channel based on trend lines and finding support and resistance. In reality, few people really know how to actually draw a trend line and, more importantly, when is a trend line validated/invalidated and when does a trend really ends or not. The answer to all the above comes from the classical higher high/lower low series and respecting some simple rules one can be successful in identifying fake breaks and if price is really turning or not.
A trend line must always start with two points and two points only. After that, we’re talking about rules and rules only.
Look for Higher/Highs and Lower/Lows Series
We should look into buying forex options or CFDs only when the whole higher/high lower/low series is broken. Otherwise, we should stick to the original two points for the trend line and after that just adjusting them.
You may be surprised to hear that drawing correct a trend line is a thing many traders miss as while it is a simple thing, some rules need to be respect.
A trend line represents a connection of two points that is being projected further on the right side of the chart – to the future. That being said, it means we should have a series or higher lows or lower highs as that would be the trend line to define our trend.
In a bearish market or a bearish trend, by the time price is making a new low we can say that the previous lower high is the second point that needs to be connected in order to generate our trend line. The way to go is to take a trend line and connect the highest value on the chart, basically the top, with that lower high and drag it on the right side of the chart. That is the main trend line that is supposed to guide the move lower.
How to Draw a Trend Line?
The opposite is true as well: in a bearish trend, a trend line should be drawn started with the bottom, so the lowest value, and connecting the value in the next higher low. Dragging the trend line on the right side will result in the main trend line of the bullish trend.
The idea is to use these trend lines to find out places to trade forex, so basically to get BUY CFDs or CALL options in a rising trend or SELL contracts or PUT options in a bearish trend by the time price is coming in resistance or support areas given by these trend lines.
Copying the trend line described above and paste it on top of the first high in a bullish trend or low in a bearish trend will result in a channel being build and fifty percent retracement in that channel is as well a place where good strike price can be found.
Trend Lines in Technical Analysis
Technical analysis is full with situations in which trend lines are involved. A contracting triangle for example is always traveling between the a-c and b-d trend line and by the time the last one is broken to the downside then we can safely say that the triangle is completed and can trade an option in that direction. If the triangle was bullish, a BUY contract/CALL option, if it was bearish, a PUT option/SELL CFD.
A wedge is traveling as well between the 1-3 and 2-4 trend lines and by the time the 2-4 trend line is broken we can assume the wedge is completed as well. If it was a falling wedge, then look for call options to be bought, while put options should be trade after the 2-4 trend line in a falling wedge is broken.
It should be noted that most of the times in trading simple things work best and this means that a simple thing like a trend line, if drawn and interpreted correctly, is giving a lot of information when it comes to trading binary options and not only.
A trend line is by definition the line of a trend and the fact that a trend is starting or already started is something that has great value for traders as it implies a five wave structure started, according to Elliott Waves Theory. That being the case, one should have to buy pullbacks and these pullbacks are being given by support and resistance levels on the main trend line.
See videos on how to correctly draw a trend line, which is key in technical analysis. Regardless the reason for drawing a trend line, it should be noted that a simple trend line is sometimes providing more information than the most complicated indicator, so knowing how to draw it offers a great advantage when it comes to trading.