What Is the Best Way to Draw Accurate Trend Lines?

forex trend line

Happy Friday!

This week’s question comes from Thony, who asks:

What is the best way to place the most accurate trend line?

Trend lines are one of my favorite ways to determine the strength of a trend. The way a market tests these levels and even how often can indicate whether momentum is strengthening or waning.

But trend lines are only useful if placed correctly. Otherwise, you could find yourself missing opportunities or worse, getting caught on the wrong side of a market.

With that said, drawing diagonal levels isn’t an exact science. There are usually multiple ways to interpret the proper placement, which is what makes trading such a subjective business.

So while I can’t show you the only way to do it, I can give you a few pointers that have helped me over the years.

In this post, we’ll cover which currency pairs tend to respect trend lines the best. We’ll also examine whether it’s better to use the extreme highs and lows of a candle or the body when drawing these levels.

Let’s get started.

Major Currencies vs Crosses

When it comes to drawing trend lines or any other technical levels, the currency pair matters. More specifically, I’ve found the more liquid pairs to behave better than less liquid ones.

Currency pairs like the EURUSD, GBPUSD, AUDUSD, etc. tend to respect trend lines better than others. This is partially due to the increased volume in these pairs versus other less liquid ones.

However, that doesn’t mean you can’t use trend lines on a currency cross like EURGBP or EURAUD. In fact, I’ve had some extremely profitable trades using nothing but trend lines on crosses such as these.

But if you’re just starting out with diagonal levels, you may want to stick with the majors.

These include:

  • EURUSD
  • USDJPY
  • GBPUSD
  • USDCHF
  • USDCAD
  • AUDUSD
  • NZDUSD

Now, although USDCHF and USDCAD are considered major currency pairs, I’d be careful with these two. The Canadian dollar pairs can be difficult to read at times, and the same goes for the Swiss franc.

Nevertheless, the list above is a good place to start.

The Japanese yen crosses are another basket of currency pairs that I favor when drawing trend lines. In fact, from a technical standpoint, pairings like the AUDJPY or NZDJPY can sometimes produce exceptionally profitable patterns.

At the end of the day, it comes down to liquidity. The pairs with the most volume tend to move in a way that’s more conducive to using trend lines.

Mind the Wicks

The most common mistake I see when a trader plots a trend line is cutting off the wicks of candles. Those highs and lows are there for a good reason and should be respected.

Now, there are cases where it makes sense to cut off a wick or two. Trading with price action like any other style is never a perfect science. Rather it’s a blend of art and science.

My rule of thumb is to use the most conservative placement. That means using the extreme highs or lows of the wicks whenever possible.

By doing this, you reduce the chance of being caught off guard by a false break. Said differently, you’ll be more confident that any resulting break is a potential change in direction.

Here’s an example of one such trend line on the EURAUD daily chart:

EURAUD incorrect trend line

Notice in the example above the trend line cuts through the upper wick. The problem here is that the breakout, which occurred several weeks later, has a big question mark above it. We don’t know whether it’s a valid breakout or not.

Now, if we draw the same level a bit higher to include the high of that first candle, we can clearly see the market is still respecting the level as resistance.

EURAUD correct trend line

By moving the level higher, we would have avoided being caught on the wrong side of the market.

That one little change made all the difference.

An exception to the rule

There are, of course, exceptions to this rule. Remember that trading is never a perfect science.

A recent trade of mine on the EURCAD comes to mind. Notice that the level below cuts off several lower wicks on the 1-hour time frame.

EURCAD trend line

I ended up shorting the break of support. I also mentioned this trade idea in the Daily Setups section of the website.

How could I have had such a high degree of conviction in a level that was cutting off so many lows?

To find the answer, we have to go back to a Q&A post I wrote a while back. In it, I discuss why a trader might be inclined to use a channel instead of a simple trend line.

The EURCAD chart above is an excellent candidate for using a channel instead of one diagonal level.

Let me explain by showing you what happens when we use the two upper wicks as our starting point for an ascending channel.

EURCAD channel

Notice how the lower level runs parallel to the upper one that connects the two highs. This gives us a channel from which we can construct an idea to go short once support gives way.

Once I noticed this pattern and observed how the pair was holding above channel support on a 1-hour closing basis (before breaking down), I had enough information to make a decision.

You could have drawn a trend line in place of channel support using the bottom of the wicks, and that would also be acceptable. However, you wouldn’t have had a chance to enter on a retest of the level as new resistance.

This particular setup was also extremely asymmetric and positively skewed at more than 5R, or 10% profit if risking 2% of your account balance. Factors like this helped persuade me to take the trade.

The main takeaway here is that the upper level of the channel gave me confidence that the lower level was positioned correctly. Also, the way the pair held above it on a 1-hour closing basis on several occasions only helped boost my confidence in this pattern and the subsequent break.

Without drawing a channel, I probably would have never found the break that led to a profit of more than 200 pips.

Being successful with price action is 90% observing and 10% doing. Even that’s probably giving too much credit to the action side of the equation.

Don't Dismiss the Importance of Screen Time

Whenever I write a new lesson on a trading strategy or technique, it’s invariably followed by emails from traders asking what indicator I use to identify setups.

As you may well know, I only use the 10 and 20 exponential moving averages. And unlike most, I don’t use them as a crossover where one side is bullish and the other bearish.

Instead, I use them to find the mean on the daily or weekly time frames. That’s it.

I found many years ago that indicators did nothing but clutter my charts. Everything I need to know is already there and can be extracted via the price action that occurs daily.

But just as important is the idea of screen time. You see, the more time you spend staring at indicators, the less time you have to study your charts.

You may think those are one in the same, but they aren’t. Take it from someone who spent years doing both.

Like anything, becoming proficient at drawing trend lines takes practice. It takes an obscene amount of screen time which means nothing but you and the price action in front of you.

The more indicators you have on your charts, the longer it’s going to take you to get good at identifying trends and drawing levels.

Those indicators you love to use demand your time and attention which detract from the time you could be using to study price action.

There is without question a certain gut feel that all traders who put in the time eventually develop. It’s what I refer to as the X-factor that can only be attained through years of hard work and perseverance.

It’s the one thing I can’t teach.

But with every level you plot on your charts, you take one step closer to having that X-factor and achieving consistent profits in the Forex market.

Final Words

Trend lines are an excellent way to identify areas of value within a given trend. They can be used to find setups with the momentum and even signal a change in trend under the right circumstances.

However, be sure to choose your currency pairs wisely. Those with the most liquidity tend to outperform others when it comes to drawing trend lines.

When trying to identify the best placement, always go with the most conservative. It will help with your entries and will offer a better perspective of a potential breakdown in the trend.

The only exception to this rule is if an ascending or descending channel exists.

When in doubt, see if using a channel helps. Sometimes having two or more wicks as a starting point can help you understand what’s happening between buyers and sellers.

Like everything, it takes a ton of practice to get trend lines right. So be sure to keep your charts free of clutter so you can focus on the price action in front of you.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

Leave a Comment:

35 comments
bep says

Interesting theme. Thank you

Reply
Jaya says

Hi Justin,
I see that there is a pullback for every trend. Why?
When a trader close a position say after a buy , does that mean that he sold the pair’s?

Reply
    Justin Bennett says

    Jaya, pullbacks in trends represent profit taking and usually occur once price becomes dislocated from the mean (average price).

    With currency pairs, you simultaneously buy one currency and sell the other. The opposite must occur to close the position.

    Reply
Tejas deshmukh says

Nicely written … Great article …for the gut thing trading in the zone is a good read imo

Reply
Tom says

Thanks Justin for your lessons. They do give me confidence although I am still on the demo.

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Aravind Gandhi says

Is there is a systematic procedure for taking the breakout on higher time frame say daily and follow it up on lower time frame say 15 min so that if it’s a valid breakout we continue to remain in position and if it was a false breakout you exit earlier in time using 15 min chart. What procedure would one follow to stay in position or exit at the right time
Thx.
Aravind Gandhi.

Reply
    Justin Bennett says

    Aravind, not for me there isn’t. I never go below the 1-hour time frame, and even that is rare.

    Reply
Mimi says

Thanks Justin and I also found it very informative that you don’t wait for 10/20 EMA’s to cross-over and something that just about everyone would tell us to do. Really appreciate all your lessons.

Reply
    Justin Bennett says

    You’re welcome, Mimi. Moving average crossovers just overcomplicate a rather simple process in my opinion.

    Reply
Darlene says

Very helpful advice about drawing trendlines, especially the part about using the wicks. How do you feel about using Linear Regression for drawing trendlines.

Reply
    Justin Bennett says

    Darlene, I don’t see the value in it. That doesn’t mean it isn’t useful, it just doesn’t fit the way I do things.

    Reply
john says

Hi Justin
Thanks for your post. The channel part is one i have not used. Will keep this in mind in future. Looking forward to the next post. John

Reply
    Justin Bennett says

    You’re welcome, John. Using the channel to fine tune a level doesn’t always work, but when it does, it’s a great help.

    Reply
Bernard says

Hi Justin
Thanks for a good insight of how to identify draw and use trend line ,I have realised my mistake on drawing the trend lines.
Great
Bernard

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Nhlanhla Musawenkosi Mpanza says

Hi Justin, thanks for the information you share its very helpful and has helped me improve on my trading a lot. Price action is definitely the best.

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mirza akhtar mahmood says

Hi, Dear Justin, ,, Good explanation about importance of trendline. Really, it works when draw properly, please important tips, How we can control our ego and emotions rather than respect and stay with technical tools. Thanks

Reply
    Justin Bennett says

    You’re welcome. I’ve added your question to the list for future posts. Thanks for commenting.

    Reply
olode says

i want to find out which of the time frames is the best for using the trend line.

Reply
HAZZA says

((Once I noticed this pattern and observed how the pair was holding above channel support on a 1-hour closing basis (before breaking down), I had enough information to make a decision)))—–
WHAT INFORMAITION
Thanks for your post.

Reply
Raj Jadeja says

Excellent piece of work, as usual.

Reply
Tahir says

Hi Justin. Great insight.
I’m a trendline base trader / analyst myself .
I self-learned the method through years of trial and error. I do not follow the conventional approach that is often taught in trading text books; however I take a unique approach to Technical Analysis via trendlines.

My trendlines are diagonal making use of actual candle tops or bottoms.
There are alot of ways to sketch a view via trendlines but do you think – in the end its the eye of the beholder on how one is drawing a trendline. The angles / the symmetry / the linear approach and making use of potential patterns in between.
Just like to know your views on it.

Reply
    Justin Bennett says

    Tahir, sure, anytime you have thousands of people working toward the same objective there will be some degree of subjectivity. But that’s where price action comes in – to find what matters and weed out the rest.

    Reply
Sandi says

I found this to be very helpful. I always wondered about the long wicks, and just thought that the long wick mean t the bears or bulls were running out of steam for the moment. I have learned a lot from your blogs. Thanks. Still a little shy at entering trades.

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Chris says

Hi Justin, thanks for the lesson on tend lines and channels, very useful. I’ve been taught to cut off the wicks when drawing horizontal resistance and support lines and place them only at closing highs/lows – is this wrong in your view?

Thanks

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Ronnie RT Maronza says

Tnx Mr justin u alwys on point on hw to analyse de charts,u hv super informative setups.🔥🔥

Reply
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