Our series on TREND LINES (TL) in the Forex market continues with part 6! Today we focus (just like part 5) on solving potential problems that could occur when using trend lines 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 to 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 6 NOT ALL PRICE ACTION FITS IN CHANNELS
At times markets move very harmonious in a trend or channel, but there are examples where price does not fit in a (trend) channel. In those cases Forex traders can either skip the pair or accommodate their lines to the ‘imperfections’ of the price movement. In this example (below) of the GBPUSD, price is obviously in a corrective pattern with wild ups and downs. Using trend lines for connecting tops and bottoms or impulses still could be a useful practice.
PROBLEM 7 CHANNEL UNDER & OVER THROWS
In other cases the trend could be great but the channel does not fit perfectly on price action. A Forex trader can decide to ‘ignore’ part of the price movements that do not fit in the channel and place it outside of the channel. When price is outside of the channel, traders call it an over or under throw (an over throw is when price is above a channel; an under throw is when price is below a channel). The reason is that markets are riding on emotions and price can therefore extend past expected support or resistance zones. For instance, in this GBPUSD example price had one under throw and several over throws. Despite these imperfections the trend and the trend channel were in balance.
PROBLEM 8 COUNTING HITS ON CHANNELS
As shown above, it is possible for price to extend past a channel. The opposite is also a realistic scenario. A hit on the channel is valid even when price just misses the top or bottom of a channel. As explained in the previous articles, channels must have 3 or more hits to be a confirmed channel. A hit can be counted even if price makes an over throw, under throw or barely misses either side of the channel. The border should be around 30 pips, which means that if price is within 30 pips of the channel it can be counted as a hit. If price is 30+ pips shy of either side of the channel, then it is not counted as a hit.
PROBLEM 9 EXPANDING, CHANGING & MULTIPLE CHANNELS
At certain occasions price does not only make an under or over throw, but price accelerates in the trend and ‘expands’ the channel. In a down trend price breaks through the bottom of the channel line; in an uptrend price breaks through the top of the channel line. A channel can be narrow especially at the start of the trend. Forex traders can certainly change the channel to accommodate an expansion of a channel. In fact Forex traders can continuously evaluate and compare channels to check which one is the best (according to the rules mentioned in previous parts of the series). In some cases leaving 2 or 3 channels on the chart is ok as well. That way, Forex traders can keep an eye on multiple versions and see which one works best.
EXERCISE: practice the above by drawing trend channels that have close hits, under throws and over throws. Post the chart down below.
PROBLEM 10 REAL LIFE TRADING
Trend lines are great for various reasons such as: filtering out trades, support and resistance, taking break out trades, taking bounce trades, and using them as a trigger. Forex traders can extensively use them in their trading: the sky is the limit on how trend lines can be combined in these various roles as well. For this particular part I would like to focus on the trading itself.
Trend lines are a great tool but for discretionary technical traders I recommend adding support and resistance analysis, chart patterns and candle stick patterns to any trading plan in order to make it more robust. Trading trend lines in a non-discretionary method is difficult because the trader must always draw the trend line on the chart themselves.
In recent weeks I have posted a couple of articles that used trend lines for their analysis because I wanted to use them in this article as examples.
- The article of October 27 mentioned 4 pairs (click here): the GBPAUD, the USDCAD, the EURUSD and GBPJPY. The GBPJPY is flying up at the moment breaking the resistance trend line and easily hitting a massive target (and went much further than that). The GBPAUD also had a success break and hit of target. The USDCAD had a small bearish trade and then bounce. The EURUSD had a bearish breakout but target is still open. Please check the article and compare it with current price to see how all these setups worked out neatly.
- The article why Forex traders must embrace the road map (click here) explained how I was looking for a bearish rejection at resistance.
- The article “3 live examples of how to remove bias from trading” and “how to remove bias from trading” are also useful in regard to trading.
EXERCISE: practice the above by opening or using a demo account. Drawing trend lines and use them for breaks or bounces. Assess what went well and what could have been better. Post comment and practice trade on the chart down below.
COMPLETION OF HANDBOOK
This concludes our series on trend lines. We hope that you have enjoyed the ride! And we look forward to hearing your feedback now that the entire 6 part handbook is completed 🙂 Feel free to drop a note down below if you have enjoyed these posts.
Last but not least, don’t forget to post the exercises down below!! Thanks for sharing this article and wish you Happy Hunting and a nice weekend.
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