Trend line: definition and construction

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the Forex market, trends reflect the average rate of price change over time. The trend is a useful indicator of where the market is rising and provides an opportunity to take action towards a specific goal. No wonder traders consider trends as their reliable partner.

How do you spot a trend?

Graphically, the easiest way to identify a trend is through the various patterns formed by price. When it occurs in a Forex pair, price movements begin to form peaks and valleys in a price chart that you can visually identify. Trendlines are one of the most common forms of technical analysis.

Different types of trends in the Forex market

Trends alert us to the general direction in which prices are moving. Prices can move up, down or stay still, as indicated by the types of trends. If there is no current trend, the value will remain relatively the same. Without changing the price, you will not be able to trade profitably.

Trends in the field of currencies can be divided into 3 types based on their direction: ascending, descending (everyone knows "bulls and bears") and sideways. They can also be divided intodepending on their duration: long-term, short-term and intermediate.

Uptrend

An uptrend means that the market is developing in an upward direction, creating a bullish trend. There is a price spurt with some periods of consolidation or movements against the prevailing direction. An uptrend is characterized by a positive rate of price change over time. Price movements on the chart form a series of higher peaks and valleys.

Trends continue until some change in terms or value is made. If the overall trend of the market is up, you should be wary of any positions that rely on the trend moving in the opposite direction.

Downtrend

Downward (bearish) trend in the foreign exchange market is characterized by lower prices, with some periods of consolidation or movements against the prevailing trend. Unlike an uptrend, a downtrend results in a negative rate of price change over time and signals a continuation of the downtrend. Value movements indicating this trend form a series of lower peaks and valleys on the chart.

The Forex market as a whole does not suffer from recessions, unlike other financial markets. Because selling is such a common occurrence, it is quite immune to downtrends in price. You are trading one currency against another, which means that something always gets more expensive, even during periodsfinancial or economic shocks.

Sideways

A side trend (flat) is a horizontal price movement between support and resistance levels. This happens when the market is in no particular direction and ends up consolidating most of the time.

A sideways trend is seen as horizontal lines between ups and downs in a currency. Such a trend can last from a couple of days to several weeks, after which the price may rise or fall. The direction in which a currency moves after a sideways trend in the market is most often the original direction prevailing before the trend occurred.

It can be said that currency prices are more stable during a sideways trend. This provides a starting point for investors with targeted trading strategies. However, the usual behavior of a trader during a sideways trend is to lay low until a new trend emerges.

Short-term, long-term and intermediate trends

Long-term or main trend lasts more than a year. Intermediate or secondary can span from three weeks to several months. Short term lasts less than three weeks. Sometimes an intermediate trend can be a correction in the main trend. It itself can be made up of a series of valleys and peaks, each of which can be defined as short-term trends.

The best way to view long-term Forex trends is on dailycharts, intermediate - on hourly and short-term - on 15-minute charts.

Concept

Probably, trend lines are the main tool for technical traders. They are easy to understand and can be used in combination with any other tool.

By definition, a trendline is a band that connects two or more lows or highs with lines projected into the future. In practice, traders consider these advanced indicators and trade at prices that react to them.

So, what can you do to make sure that the trend line you create reflects the actual market situation?

Use limits

You want to draw a line connecting two (or more) swing lows or highs. On the chart, these are peaks and valleys created by zigzag prices. As soon as you connect some peaks (or valleys) with others, you must make sure that the line is not interrupted by any candle between these two points.

For example, if you have connected two swing lows, but the price breaks the line between these two points, the readings will not be reliable.

Specialists recommend placing orders a few pips above the support line or below the resistance line. Thus, if the price reacts before hitting the trend line, you still have a chance to get into a trade. You must remember that if there are many traders in the market who are looking at the same price reflected in support/resistance indicators,there is a chance that orders will be stacked around these levels.

Use more points when drawing a line

As you can see, most guides refer to two or more highs/lows that make up a trendline. The reason for mentioning a larger number is that these indicators may remain relevant far into the future or change the value several times. Between two points, a change and a return to the original position can occur. Trendlines do not always exist in the same form.

For example, you can draw a line connecting any two points on the chart. You will create it because there were two different highs in the last 50 values, and you drew a line between them. But in fact, this does not mean that such an indicator is a valid trend line.

To really confirm it, you need to see that the price is actually reacting to the line drawn from the previous two points. In fact, a third high or low is needed to really strengthen the trend. After that, you will be able to see the state of the market much better when the price returns to the trend line again.

Every time you see the price bounce off one line, there is an increased chance that other market players see it too and adjust to the changing conditions. This can help you make several profitable trades in a row (but keep in mind that trend lines won't last forever). To avoid losing, it is enoughjust correctly set stop losses. When will the trend line forecast be most reliable? Provided you can capture more fluctuations.

Buy bullish, sell bearish

The trend in the market is your permanent partner. Bulls and bears must be taken into account without fail. This hard and fast rule also applies to trading lines. For experienced traders, this means that you should only buy bullish lines (support) and sell bearish lines (resistance).

A bullish trend means that the price is moving up, so you should look for opportunities to buy. These occur when the price falls and approaches the line that caused the upside bounces earlier.

A downward slope trend (bearish trend) means that the price tends to go down, so you should look for opportunities to sell. They occur when the price moves up and approaches the line that previously caused bounces down.

Trading only in the direction of the trend allows you to use potential bounces as efficiently as possible. And while they won't always give you winning trades, successful trades should give you more pips than trying to trade against the trend.

How to draw a trendline?

As you can see, this is a very simple tool to use. You are just connecting the dots on the diagram. The above tips will help you draw them with a forecast for the future. Make sure the lines you draw connect more than two highs or lows and have not been broken between those points. Don't forget to find the third bounce to check the indicators. Also, make sure you use the trend trading opportunity by buying in bull markets and selling in bear markets.

How to show line in chart only in Excel?

As can be understood from the above, a trend line can represent the trend of data in the near future. Therefore, it must be displayed on a diagram for easier viewing and study. This can be done in Excel.

If you want to show the trend line only in the chart, you just need to add a trend for it first and then hide the original datasets in the chart.

In Excel 2007/2010

Trend line in this version of Excel is created like this. Select a data series in the chart, right click. Select Add Trendline from the context menu. Then specify its type and click the "Close" button in the "Format" dialog box that appears.

Remember that users cannot add a trend line for pie charts in Microsoft Excel.

Select a dataset in the chart and right click to display the context menu, then click Format Data.

In the dialog box that opens, click "Fill" in the left panel, and then check the "No Fill" box and click "Border Color", then select "No Line".

Click "Close" and the chart will now showonly the trendline is shown.

How to do it in Excel 2013?

Add a trendline in Excel 2013 by right clicking on the dataset. Select the "Add trend line" sub-item from the context menu. In this version of the program, it is also impossible to build it in pie charts.

Select a dataset and right-click to display the context menu, then click Format Data Series.

Then, in the Data Format panel, click the Fill and Line tab and check the No Fill and No Line checkboxes in the FILL and BORDER sections, respectively. Now only the trend line will be shown in the chart.

Which indicators should I use?

It has been shown above how trend lines are built manually using Excel charts. However, there are ways to automatically create them on the chart and get good results. This is especially important if you trade with several currency pairs at the same time. If you trade with different denominations and using small time frames, creating trend lines manually can be time consuming and labor intensive.

True Trendline was developed exactly to help such traders. This is an indicator of trend lines that builds them automatically, without the participation of a trader. To run this tool, you only need to install it on the chart used in trading. In addition, this indicator has some positive features:

• can significantlysave you time;
• the lines he draws are always correct and valid, unlike the actions of an inexperienced trader who can make mistakes.

In addition, this tool is available completely free of charge, which can also be attributed to great benefits.

Because trendlines are an essential part of technical analysis, their correct application is essential for every market player. If you do not have enough experience to create them completely by hand, such an assistant tool is a must for you.