It seems that trading with the trend as a strategy has been around since the beginning of time. Yet, many beginning traders ignore the power of trend. As a matter of fact, often they go counter trend without intending to do that.
There are a many different ways to assess the trend. You could use moving averages, indicators, look for areas of overbought or oversold, and of course, you can utilize trend lines.
Trend lines, like anything else, come in different flavors. There are:
- Rising trend lines (bullish)
- Falling trend lines (bearish)
- Flat or horizontal trend lines (channel)
Horizontal Trend Lines:
Often horizontal trend lines are placed on the chart to identify areas of support and resistance. The more often price has touched the horizontal line, the more significance is to the line (to that price level).
The more often price has tried to move past this trend line, but fails to advance, the stronger is the areas of support/resistance.
Traders keep these horizontal trend lines on the chart because they it is significant if price should touch the line again and/or advance past the trend line.
Rising Trend Lines:
Rising or upward sloping trend lines are bullish by nature. These trend lines are formed by connecting the price peaks over a certain period of time. The greater the number of price “touches”, the more significant the trend line.
Falling Trend Lines:
On the other end of the spectrum are falling trend lines, which of course are bearish. The trend lines are formed by connecting price lows over a set period of time. Again, the more often price touches the trend lines, the more significant the trend line and price level.
Keep in mind that trend lines, no matter what type, are far more important if they are formed on higher time frames as compared to the 5 minute chart.
You might be on a 5 minute chart and be able to connect 3, 4 or 5 price highs; theoretically have a “Trend line”. However, such a trend line is of little significance unless you are trading the 1 minute chart.
Remember, trend lines carry far more weight if price touches a level repeatedly and better yet, if you are on a higher time frame chart.
How do you trade a trend line?
So what do you do once you have an established trend line? Aside from identifying that price is moving up, moving down or just flat lining, trend lines can tell you a lot more
- As price get closer to the trend line you might look for price to a break through the line. Once price has broken the trend line it essentially is has changed its direction, changed the trend.
- As price approaches the trend line it may simply touch the line, turn around and continue in the same direction.
No matter how price behaves once in proximity of the trend line, it’s important that you know what you will do once price gets there.
You need to be clear what you have to see on the chart before you trade a break out or a reversal. Make sure you have a clear set of rules for your trade strategy and stick to it, no matter what.
Again, remember that any trend line breaks or touches on the higher time frames have far more significance compared to them occurring on the lower time frames.