Trend Line Trading-Stay between the Lines

Trend Line Trading-Stay between the Lines

Submitted by adil on Thu, 01/30/2014 - 09:53

Trend lines is a basic tool that every new trader should learn and understand before actively trading binary options. In fact, price is the only true indicator of market direction which is mostly responsible for creating profit or loss situations and therefore, it is necessary to use price history to effectively analyze the market.

Trend lines is a powerful strategy you can employ to analyze market. They help you to identify many things such as when trade kicks off of, whether the price is stating or moving or is it worth trading or not. Similarly, they also indicate when reversal of price direction may take place. Traders of all levels use trend lines and even the most basic trend lines strategies can yield outstanding results for them.

The Price Movement:

Price mostly moves both up and down as it cannot move in one direction for long. The price movement develops trends when selling is more powerful than buying and vice versa. When a price reaches new price lows but manages to stay below former highs when it raises again, a downtrend occurs. On the contrary, an uptrend occurs when a price rises to reach new highs but stays above the previous lows as it subsequently declines.

The following chart illustrates this concept more clearly. The chart shows both the price swing highs and lows that are higher than their former highs and lows for an uptrend.

Drawing Trend Lines:

Increasing and decreasing value of an asset’s price creates an uptrend or downtrend respectively. You can use drawing tools easily available at almost every platform to highlight the trend and monitor it more easily. Similarly, you can also observe multiple tends occurring at different time frames just by drawing a line to mark price trends. This is especially beneficial when you need to switch from an hourly chart to a daily chart as it provides you additional foresight before placing a trade.

Drawing a trend line is not a difficult art to master. For instance, for an uptrend, start drawing the trend line using “trend line” drawing tool in your charting platform from starting point of trend and extend it along the trend until it runs just below the next price lows. Repeat the same procedure for a downtrend but in opposite direction.

Trading with Trend Lines:

Basically, trend lines are used to foresee possible trade reversals in addition with highlighting trades. The trend may reverse when price breaks through the trend line instead of respecting it. Everyone knows that the trend lines breakdown may or not be a buy or sell signal because they often need to be adjusted or even redrawn.

Another common use of trend lines is to identify possible support and resistance areas for price. For instance, you can use trend lines to indicate the point when price will again increase after correction stops declining (support) in uptrend. Similarly, for downtrend, you can confirm when correction will stop rising (resistance) and price stops decreasing again.

However, traders should only take guidance from trend lines because price will not necessarily stop at trend line. You should be flexible while using trend lines as the price can stop either beyond them or just short of them. Finally, trend lines provide a very good context for price movement. A trend line can warn you when trade may reserve and can help in estimating future price movement.