Technical Analysis Basics: The Trend Line

A trend line is a pretty basic technical indicator used in the early stock market and is also used in the forex market. This technical indicator is still used today. Creating and using one is quite simple. Let's go see what a trend line is and what uses can we get from this technical indicator.

Creating a trend line is pretty simple. First we'll need a historical price chart of a currency pair for a given interval of time. Other charts used for technical analysis can also be used in conjunction with a trend line. Next, we would draw a connecting line to two or more points of a graph called pivot points (i.e. points where there are higher lows and evidently lower highs or places where the price would change to a certain degree). Basically, that would be it.

This is your trend line for that currency pair at that specific period of time. So what do we understand from this trend line? The trend line reflects the direction of the particular currency pair you are tracking down. With this you may judge when to enter or exit trade.

Trend lines are widely used in technical analysis. This would represent historical price data in the format of a chart. Back in the day trend lines were drawn by hand on paper charts. Nowadays you have charting software that simplifies the creation of technical indicators, charts, including trend lines.

When you are using trend lines it is important to use one that coincides with your trading strategy. Make sure it is zoned in to your specified price interval period. This is true whether you take a short position (e.g. plotting prices at 1 minute intervals) or a long position (e.g. plotting positions/prices at hourly, daily, weekly and even monthly intervals).

You can say that trend lines act as either as a floors or as a ceiling for your given price data. By this we mean that if a new trend would slope in an upward direction and break through your established trend of your ceiling price data this is an upward or a positive trend. The opposite of this, of course would be a downward or a negtive trend.

One basic example we can use is that when a currency would return to a principal trend line a trader may open new positions according to the direction of the trend. And when the price breaks through the principal trend line (taking a negative trend) it becomes a signal for the trader to either trade at the opposite direction of the trend or to exit. Trend lines can also be used by traders in many more ways.

All in all, remember that a trend line is only one of the technical indicators available to help you call your shots. The simplicity of this technical indicator and its ease of use is so basic that all traders ought to become familiar with it.