trend lines

Trend lines are drawn on charts to help predict the general direction of price. They also help you to see reversals. On the chart below the green line is a trend line.
Trend lines also help to determine good entry and exit points, and help you decide where to put your stops. Wow! They should be called magic lines, right? Well, not really. They are quite good but, like any form of analysis, if used alone they won’t make you pips. However, they make a great addition to your trading arsenal.
The main problem with trend lines is placing them on your chart. It can be a little intimidating to start with but it is quite easy to get the hang of it. In this section, you will learn how to place trend lines on your chart, and use them to make pips!

Placing Trend Lines

There are two main types of trend lines: bullish trend line and bearish trend lines. A bullish trend line has a positive slope and is formed by connecting two or more low points. The second swing low must be higher than the first swing low. Check out the example below.

 A bearish trend line is formed by connecting two or more high points. The second swing high must be lower than the first swing high.

So placing lines is pretty easy. All you need to do is:

1. Identify two swing low/high points
2. Draw a line joining them.

There you have it! Now your chart has trend lines! But wait one minute newbie. Even though you can place a trend line based on two swing low/high points, the trend line remains unconfirmed until it is hit a third time.

 Once a trend line is placed and it has had a third bounce it becomes active. Now the price should find support or resistance at the trend line. It should have trouble breaking the line. If the price does break the line it usually means the trend is over.

 Trend lines can be placed on any time frame but they’re more effective on longer time frames. Also, the longer a trend line is active the stronger it gets.

 Trend lines have many uses, but the main ones are: trend line bounces, and trend line breaks. Check out the picture below.

 This trend line has had three bounce so it's now active. Now that the price is approaching that line again, what will happen? Well the trend line will either continue to hold or will break the line. So what happened this time?

Wow it broke and it climbed 200 pips!
This trend line was based on three points. On the fourth approach, the trend line tried to act as resistance. If it had succeeded in acting as an area of resistance the price would have turned around and headed back down. However, the bullish movement was too strong. That means the bearish trend is over and a bullish trend is starting.
Now take a look at a trend line bounce.

 Again, this trend line has had three bounces so it is now active. As you can see in the picture, the price is approaching the line a fourth time. The price is either going to break the trend line or bounce away from it. This time it bounced.

Look, it bounced and went up 150 pips!
If you read about candles in the previous section, you will have noticed, that in the picture above, there was an indecision (reversal) candle on the trend line. You might technically think that because the wick was below the line the trend line was broken. Well that's where it gets tough!
There are three schools of thought on what constitutes a trend line break. Strict, moderate and lax.
Strict - These trend line users believe, that as soon as a candle passes through a trend line the line is broken, and a trade can be entered.
Moderate - These trend line users believe, that as long as a candles body does not close beyond the trend line the line is not broken. So a wick can poke through the line, like you saw in the image above, but as long as the body doesn't then the trend line is still active.
Lax - These trend line users believe, that a candle must first break through the line and then the body must close beyond. When the next candle opens beyond the line they finally consider the line broken.