Trendline Trading Basics

Article Summary: Trendlines allow traders to set precise entries in directional markets. Today we will review the basics of trading trendlines in Forex.

Drawing trendlines is an important skill for every Forex trader to master. These lines can be drawn on any chart and effectively provide traders level for support and resistance for trading. The key is to match up a series of higher lows in an uptrend and lower lows in a downtrend. Let’s look at a detailed example of drawing and trading trendlines using the AUDCAD.

Below is an excellent example of an active trendline on the AUDCAD currency pair. The trendline is formed first by connecting the lows from October 2012 and February 2013. The key is to find the first two points on the chart to connect. When in doubt of where to draw a trendline, start by connecting the wicks of the previous lows on your graph in an uptrend. After these levels are joined, support can be extrapolated by then extending the trendline across the chart of our choice.

Learn Forex – AUDCAD Trendline

(Created using FXCM’s Marketscope 2.0 charts)

Once the trendline is drawn, traders will begin looking for areas to enter new positions. The first opportunity to trade a trendline is on the third touch of support in an uptrend. Traders will ensure the trendline is not broken while looking to buy on a swing using an oscillator to decide when momentum is returning to the trend. In today’s example we are going to time an entry with the trend using CCI (Commodity Channel Index)

Below you can again see our trendline on the AUDCAD, but this time we have attached CCI. Traders will execute when prices bounce off our trendline and CCI crosses back above an oversold value of -100.An oversold reading of -100 means that CCI has pulled back to a relative low compared to past price. This allows traders to buy on a dip and enter the market when momentum returns to the market and CCI crosses above the -100.

Learn Forex – AUDCAD Trendline and CCI

(Created using FXCM’s Marketscope 2.0 charts)

Lastly, when trading trendlines it is always important to consider managing your risk in the event that price breaks from our previously defined trading levels. Currently our trendline is providing support for the EURCAD near 1.0441 in an uptrend. If price breaks below this figure, traders should look to exit any long positions through the use of a stop order.

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter @WEnglandFX.

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