Our series on TREND LINES (TL) in the Forex market continues with part 5! Today we focus on solving potential problems that could occur when using trend lines (TL) in real live Forex trading. There is a difference between the “perfect theory” and “actual implementation” and this part tries to bridge the gap.
If you would like review the previous parts of the series on trend lines, please click on these links:
In this post problems and answers will be compiled to help traders with solving practical issues.
PROBLEM 1 SHALLOW TREND LINES (TL)
Is it possible to trade very shallow trend lines? Yes but with caution. The danger of very shallow trend lines is the fact that a horizontal support and resistance (S&R) is close by. When price breaks through one layer of S&R, the horizontal level could stop price from continuing. There are a few ways to handle it:
- Take the TL break and ignore the horizontal level;
- Good for small pauses in overall big trend;
- In strong trends price keeps pushing and previous S&R was only a short stopping point for further trend continuation;
- Wait for a strong candle close (near high or low) to break TL and/or horizontal level;
- Good if there is doubt about S&R strength;
- Most useful if trend line correction is relatively big compared to trend;
- Wait for the horizontal level to break;
- With strong S&R levels it could be better to wait for an actual break of that level;
- A risk of a false break out is always present, which can be partially countered by waiting for candle stick confirmations (see B);
- Skip the setup and move on to new currency pairs.
Method A is the most “aggressive” and D the best “conservative.”
PROBLEM 2 STEEP TREND LINES (TL)
Steep trend lines are often viewed as more difficult to trade. It is true that steep trend lines tend to break quickly but without necessarily moving much to the opposite direction. Steep trend lines are most useful to trade when price is going against the bigger trend. In these cases, a break of steep trend line could equal to a completed retracement and a bigger trend continuation. Trading breaks of steeper trend lines against the trend is extremely dangerous and only very seasoned traders might attempt it. Steep trend lines however could be a good method to trail stop a trade (locking more profit along the way).
PROBLEM 3 HORIZONTAL TREND LINES (TL)
Trading the break of a horizontal support or resistance line can especially be troubling because price often encounters volatility upon the break. Price breaks a bottom or top but then quickly reverts to the opposite direction, which can be a very frustrating and painful experience. I see this particular pattern occur often on the GBPUSD.
Any breakout is vulnerable to a pullback – immediately (dark green example) or later on (light green example). Only in some cases does price continue flawlessly (blue). As a Forex trader our options are limited but we can use:
- Candle closes and wicks to measure strength of break;
- Divergence to determine if there is any weakness;
- Multiple time frame analysis to zoom in and out and see the break from various angles.
EXERCISE: practice the above by finding a trend and drawing shallow and steep trend lines on it. Post the chart down below.
PROBLEM 4 HOW TO MEASURE DEGREES
In various parts of this series on trend lines I mentioned that trend lines have various angles. It is important to emphasize that the measurements are rough approximations and certainly not a precise figure. When I write that shallow trend lines have 0-10 degree angle, this is just used as a rough indication. The most important is to realize that there are shallow (outer), normal (trend), and steep (inner) lines.
PROBLEM 5 HOW MANY TREND LINES TO DRAW
I like to draw many trend lines in all directions: the more the better because extra information is available. It really does not matter if the trend line is angled up or down and whether there is a range or up/down trend. BUT… Forex traders must keep a balance and ensure that the chart does not become overcrowded; otherwise this could lead to paralysis of analysis during trading.
Basically, I am happy to keep as many trend lines on the chart as long as the trend line is relevant and I can keep a clear vision of the charts with each trend line. Here are some extra pointers:
- Drawing multiple trend lines is a great benefit because the lines provide a zone of support and resistance rather than just a single point of reference (like a fan).
- Using the same top or bottom twice or three times for different trend lines is perfectly fine.
- The trend line does not have to start at a top or bottom but could be from the middle of a swing as well, as long as it adds values, has sufficient hits and is near price.
Ultimately if I do need to remove trend lines to make the charts more readable, I make decisions based on how many price hits the trend line has, how close it is till price, and how neat (wicks/candle outside) the trend line is. In the screenshot below I drew a ton of trend lines but not all of them need to be on the chart. The orange ones can be easily removed either because current price is far from the trend line or the information is too duplicated. The purple trend lines could be the ones that are left on the chart after the orange ones are gone. This is just an example; some traders might add or remove more trend lines depending on their personal preference.
EXERCISE: practice the above by drawing multiple trend lines and show which charts are ok (purple) and which ones are irrelevant (orange). Post the chart down below.
NEXT WEEK’S GOAL
Next week’s article (part 6) will continue with more problem solving of trend lines and also dive into the real practical side of trend lines. What are the best ways of using trend lines? What trade setups are possible with trend lines? That and more can be found in part 6.
Don’t forget to post the exercises down below. Thanks for sharing this article and wish you Happy Trading and a nice weekend.
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