Best Educational Content

Hello traders! In this week’s newsletter, I’d like to show you a couple of techniques to use trend lines to help you determine the strength or weakness of a trend.

As you have probably noticed from reading our weekly Lessons from the Pros newsletters, our core strategy includes going long in up trends at high quality demand zones, and going short in downtrends in high quality supply zones. A few significant stumbling blocks that new traders encounter is defining the trend that they are in, if that trend still has room to run, or if the trend is getting ready to end. While no trend definition technique is truly infallible, proper use of trend lines can help keep you on the right side of the charts.

So let’s define our trends first. An uptrend is a series of higher lows and higher highs-a trend line is most commonly drawn connecting the higher lows. As we learned in grade school, it takes two points to draw a line, but in a trading, that isn’t enough. We like to have at least three touches of the trend line to confirm that the line is valid. As far as I am concerned, the more touches of that trend line the better! A downtrend is defined as a series of lower highs and lower lows, with the trend line drawn connecting the lower highs.

EURUSD

One thing to note about the technique illustrated above: I drew my trend lines through a few candle wicks and tails, but not through any candlestick BODIES. Because the spot forex market is a decentralized marketplace, and not every brokerage firm displays the exact same prices especially at volatile turning points in the market, my plan allows me to draw in this fashion. Some traders will insist that you may never draw through any part of a candlestick. My rule works for me, so I will continue to use it!

In any particular move in the market, there are two opposing forces at work – buyers and sellers, demand and supply. This should be a bit obvious to any reader of our newsletters! But there is also a competition between different groups of buyers, and different groups of sellers. Some are more aggressive than others, some even bordering on the foolishly aggressive. To illustrate this point, we will look at trend lines now representing different parts of an uptrend.

In the following chart, I’ve drawn in three trend lines, first the blue, then red, then pink. Each line is getting progressively steeper indicating increasing momentum in this trend.

USDJPY

One very important point about these steeper trend lines is the faster a pair goes one direction, once the trend reverses the move is usually very fast as well! Who do you think is still buying this currency pair at the fourth or fifth touch of that trend line? Whoever they are, they have been chasing a trend and missed the good entry many, many candles ago! The phrase “irrational exuberance” famously uttered by Alan Greenspan a few years back, could be used to describe the buyers high up on this steepest trend line. As the trend lines get steeper, these competing buyers are becoming more and more aggressive. I would prefer to find another pair to trade, than to buy high up on this curve. By the way, in the spot Forex market, this three trend line technique indicating a too-strong trend is also applicable to downtrends. For brevity’s sake, a chart was not included. One more hint about these three steeper trend lines: don’t try to be the hero who sells the very top of the market. If a very strong uptrend is still valid, I would prefer to wait for that steepest trend line to break before trying to short this pair. There is no Hall of Fame for shorting at the highest point, but there is a poor house for people who keep trying to pick the top! (Or buy the bottom, for that matter!)

So, if three trend lines can indicate a trend that is going one direction too fast, can they also indicate when a trend has sufficiently slowed to change my bias from long to short (or short to long)? Glad you asked, and the answer is yes. On the following chart I drew in three flatter trend lines, each having at least three touches making them valid lines. As they get flatter, that is indicating a weakening uptrend here.

USDCAD

When the third flatter trend line finally does break, I am no longer looking for long trades but focusing on shorting opportunities. As in the previous example, I’m not trying to be the first trader to be short here! When the first (blue) trend line breaks, that doesn’t necessarily mean we are in a downtrend, just that the uptrend is losing a bit of momentum.

If you choose to employ these trend line techniques to your trade plan, please make sure you are using them in conjunction with our core strategy of buying in demand and selling in supply. Keep your losses small and let your winners run!

Learn to Trade Now


This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Editors’ Picks

EUR/USD trades near 1.0500 with bearish bias due to risk-off mood

EUR/USD trades near 1.0500 with bearish bias due to risk-off mood

EUR/USD scrambled for higher ground on Monday, clipping back into the 1.0500 handle amid a broad-market relaxing of Greenback bidding as investors step back into a risk-on mood, albeit with limited impact. 

EUR/USD News
GBP/USD recovers a major part of its intraday losses, climbs back above mid-1.2500s

GBP/USD recovers a major part of its intraday losses, climbs back above mid-1.2500s

The GBP/USD pair attracted fresh sellers on Tuesday and dropped to the 1.2500 neighborhood, closer to its lowest level since May 2024 during the Asian session. 

GBP/USD News
USD/JPY drops below 154.00 as US Dollar surge stalls

USD/JPY drops below 154.00 as US Dollar surge stalls

USD/JPY drops below 154.00 in Tuesday's Asian trading. Fresh tensions surrounding US-China trade war underpin the safe-haven US Dollar while the Japanese Yen catches a fresh bid on PM Ishiba's calls on businesses to hke wages. Fed Minutes are next in focus. 

USD/JPY News

Editors’ Picks

AUD/USD remains in the red below 0.6500 on US-China trade risks

AUD/USD remains in the red below 0.6500 on US-China trade risks

AUD/USD remains under selling pressure below 0.6500 in the Asian session on Tuesday, reversing some losses. Trump's threatened additional 10% tariffs on China, weighinmg heavily on risk sentiment and the China-proxy Australian Dollar while lifting the haven demand for the US Dollar. 

AUD/USD News
USD/JPY drops below 154.00 as US Dollar surge stalls

USD/JPY drops below 154.00 as US Dollar surge stalls

USD/JPY drops below 154.00 in Tuesday's Asian trading. Fresh tensions surrounding US-China trade war underpin the safe-haven US Dollar while the Japanese Yen catches a fresh bid on PM Ishiba's calls on businesses to hke wages. Fed Minutes are next in focus. 

USD/JPY News
Gold: Trump tariffs threat lifts XAU/USD, focus shifts to Fed Minutes

Gold: Trump tariffs threat lifts XAU/USD, focus shifts to Fed Minutes

Gold price has staged a solid comeback so far this Tuesday’s trading after hitting a six-day low at $2,605 in early dealings. Gold buyers look forward to the Minutes of the US Federal Reserve’s (Fed) November meeting for the next push higher.

Gold News
TRON Foundation becomes the largest investor in Donald Trump's World Liberty Financial

TRON Foundation becomes the largest investor in Donald Trump's World Liberty Financial

Donald Trump-backed DeFi platform, World Liberty Financial, received new support on Monday after Tron founder Justin Sun announced that the Tron Foundation had invested $30 million into the president-elect's platform, making them its largest financial supporter.

Read more
Eurozone PMI sounds the alarm about growth once more

Eurozone PMI sounds the alarm about growth once more

The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Best Forex Brokers with Low Spreads

Best Forex Brokers with Low Spreads

VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.

Read More

Strategy

Money Management

Psychology