How to draw a trend line? First of all, we need to clarify that drawing an uptrend line is different
from drawing a downtrend line. When you draw an uptrend line, you connect higher lows,
so the line will be below the price. When you draw a downtrend line, you connect lower highs, so the
line will be above the price.
Here we have a Euro-Australian dollar.
It is clear that we are in an uptrend, but let's define it by drawing a trend line, that can also be useful
for future trading decisions. To draw an uptrend line,
I need to connect higher lows, so starting from here,
I draw my first line trying to connect these two lows.
When you draw a trend line, you also need to check if it has any significance for future prices.
In this case, you can see that here the price crossed a bit
the trend line. Not that much,
but here it happens again and it is even worse than before.
Even if we go further, here for example, the price simply doesn't respect the trend line
and so this trend line doesn't have any particular meaning,
we can also delete it.
Let's try for example to connect these two lows.
Is this trend line more significant?
Let's see if the price respects this trend line. Here it breaks the trend line.
And here again... and here
even worse and probably in this area the trend line worked a bit as a resistance and, at the end, it worked
for a small period as a normal trend line, but, overall, I would say that this trend line also doesn't have
any particular meaning.
It simply never worked and never was a good trend line.
Let's try to connect these two lows here, for example. As you can immediately see, this kind of trend line
is much better. Starting from here,
we have a second touch here and then many times the price tested the area around the trend line and
got rejected. Once again, in this area.
So let's check what happened next.
You can see that here the price went a bit under the trend line, even if not that much.
Remember that the trend line is an area, just like support and resistance.
So you shouldn't expect that the price hits the line and immediately bounces back.
It's not an exact price,
it is an area.
After this period, the trend line starts to work again perfectly.
Here it goes up, it comes back and then it goes up again.
Then it comes back on the trend line and bounces back.
At the end, the price breaks the trend line and starts a new down movement.
So my advice is: try to connect higher lows, in case of an uptrend, or lower highs if it is a downtrend,
and check if your trend line has any significance at all.
This means that after the first two points, there must be at least a third point that clearly respects
the trend line, pushing the price back.