The trendline Forex indicator is an integral tool of the price action in Forex. This material will teach you how to properly apply and trade the Forex trendline.
Trendline Forex Indicator Explained
The Forex trendline is a single line, which outlines one directional price move from one point to another. When the price is following a trendline, this means it is changing its price following a general direction.
Understanding the concept of trends is integral in your ability to make money from the Forex portfolio management. Forex traders attempt to catch trend in order to buy when price is low and to sell when it is high, or the opposite. For this reason, the trendline Forex indicator is one of the crucial tools for boosting your Forex success rate.
Below you will see an example of a trendline Forex instrument:
This is a 5-munte chart of the EUR/USD. The blue line indicates a Forex trendline indicator, which measures a price increase. The black arrows point the moments when the price tests the trend as a support (from below). Every time the price meets the trendline indicator we see an increase in the Forex rate.
We see 11 increases after interaction with the trendline. If you buy the EUR/USD Forex pair in every one of these moments, you will be able to sell on a higher price later. This is how the trendline Forex traders manage to generate profit from currency trends.
How to Draw Trendline in Forex
How draw to trendline in Forex depends on the points you have on the trading chart. Simply take a ray from your Forex trading platform, click on the first edge you see on the chart and then stretch it through the others.
Every two bottoms could be connected with a single line. However, if three bottoms could be connected with a single line, then you have a bullish trend (inclined upwards). So you need three bottoms lying on the same line in order to confirm and draw a trend line. The first two bottoms just hint that the trend might be occurring on the chart. If the price creates another bottom on the same line, then you confirm the presence of a real bullish trendline Forex indicator.
Types of Forex Trendline Indicator
There are two types of trendline Forex indicator depending on the direction of the price.
Bullish Trendline Indicator
If the Forex tendency on the chart is bullish, you should use a bullish trendline indicator. You should take the first bottom on the chart, and then you should stretch the line through the other bottoms. The bullish trendline indicator should contain the zones around each of the bigger bottoms.
The two images above are example of bullish trends. If the Forex rate accounts for higher tops and higher bottoms you are looking at a bullish trend.
Bearish Trendline Indicator
If the Forex tendency on the chart is bearish, then you should use a bearish trendline indicator. Take the first top on the chart and stretch the trendline Forex indicator through the other tops. The bearish trendline Forex indicator should contain the zones around each of the bigger tops.
This is a real example of a bearish trendline indicator. The chart covered is 5-minute of the EUR/USD Forex pair. As you see, the EUR/USD Forex rate on the image above creates lower tops and lower bottoms.
How to Trade Forex Trendline Indicator
The key to making profits from Forex trendline indicator is to find a pre-existing trend and place a trade in the same direction. If the Forex rate has been moving lower for a significant amount of time the odds of it continuing to move lower in the near future are high. Opposite is applicable as well. If the Forex rate has been increasing recently, then the chances that the price will keep increasing are high.
Predicting when a trend is going to begin is one of the main challenges of Forex trading. The earlier you ride a trend the more money you are likely to make.
Due to this, people have devised complex methods to take advantage of trends. When trends are beginning, some use indicators and others use economics in order to support their trading decisions.
It is far easier to jump into a pre existing trend than it is to try and figure out when a new trend may begin. Trying to find the beginning of a trend may lose you a lot of money.
By jumping into a trend after it has already begun your sacrificing a little bit of potential profit for a higher probability trade. Opposite to this, by jumping into potential trend, you increase the potential profit of the trade for a lower probability trade.
Forex Trendline Trading Example
Now that you know how to draw trendline in Forex and how to trade Forex trendline, we will switch to a real Forex trend example.
This is the 5-minute chart of the EUR/USD for Sep 8-9, 2016. The three points on the chart should be used to build the bullish trendline indicator. You should stretch the trendline through the three bottoms. Then you should buy the EUR/USD in the moment when the price bounces from the trend line.
Always use a Stop Loss order when you trade Forex trendlines. You should put it below the bottom created in the moment of the third bounce as shown on the image. Then if the Forex rate goes against you, the trade will be protected. Conversely, if you trade a bullish trend, the stop should be above the top you use to open your short trade.
The price increases afterwards. There are four bullish impulses created after the creation of the third top. Every one of these three impulses brings profit to your long trade.
In the red circle you see the moment when the EUR/USD Forex rate breaks the bullish trendline. This is a signal that the bulls are exhausted and the trend is probably finished. Therefore, you should close your long trade in the moment of the trendline breakout. The price difference between the third bounce and the breakout is your profit.
- The Forex trendline is an indicator which outlines the price direction of a Forex pair.
- Understanding the concept of the Forex trendlines will definitely improve your Forex trading routine.
- If you enter early into a trend you have the potential to make more money, but this is riskier.
- If you ride an already existing trend it is safer, but you will make less money.
- There are two types of Forex trendlines depending on the currency rate direction.
- Bullish Forex trendline – takes into consideration the bottoms of the Forex pair
- Bearish Forex trendline – takes into consideration the tops of the Forex pair
- You should use a ray to draw a valid Forex trendline indicator:
- Bullish Forex trendline – Take the fist bottom and stretch a ray through the other bottoms. The trendline will be inclined upwards.
- Bearish Forex trendline – Take the first top and stretch a ray through the other tops. The trendline should be inclined downwards.
- You should remember two things trade profitably the Forex trendline:
- Buy low, sell high.
- Sell high, buy low.
Author: Christopher Webb
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