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Using Trend Lines for Support and Resistance

Using Trend Lines for Support and Resistance

Thomas Long, Course Instructor

One of the best tools for determining support and resistance is a trend line.  A test of a trend line can not only offer a good entry point, but offer a relatively low risk trading opportunity.  The idea is to buy as close to support as possible and place your protective stop below that support or to sell as close as possible to resistance and place your protective stop above that resistance.
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We can see on this 8-hour chart of the AUD/USD how to draw the trend line and then to use a test of that trend line as a good entry point.  The key here is that the trend was up on this pair at the time, so we were only looking for buying opportunities on a test of support.  To draw a trend line, we need two lows or two highs to connect.  On this chart we connected two lows noted as point 1 and point 2 and extended that line out.  I think that the best trading opportunity comes on the first test of support which is point number 3 on this chart.  You can see how close the market traded down to that support level and then reversed.  Buying close to trend line and placing your stop below that support can keep your risk lower as the distance between your entry and the protective stop level can be relatively close.  Because that risk is small, you have an excellent risk:reward ratio and can maintain profitability even if losing more trades than you are winning.  Also note that the longer the time frame chart, the better the chance of the trend line offering solid support or resistance.  While the daily chart is the best chart to use for technical analysis, an hourly, 4-hour or 8-hour chart can still offer many solid trading opportunities like the one you see here.
 

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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