Using trendlines can be a valuable tool for technical analysis traders. However, it’s important to exercise caution and not rely on them blindly. In this article, I’ll explain why you should never place full trust in trendlines.
What is a Trendline?
A trendline is a straight line connecting significant highs or lows:
-
In an uptrend, it connects the lows.
-
In a downtrend, it connects the highs.
Trendlines form the basis of trend channels:
-
Uptrend channel: a line connecting rising lows + a parallel line connecting rising highs
-
Downtrend channel: a line connecting falling highs + a parallel line connecting falling lows
Overall, drawing trendlines and channels provides a clear picture of market structure and price movement. However, when it comes to precise entry and exit points, trendlines often fall short and may even be counterproductive.
Forex Trading is a Probability Game
Trading is fundamentally about probability, not certainty.
-
We enter a BUY when the probability of price going up is higher than going down.
-
Any system must be filtered to increase accuracy and remove noise.
Personally, I rarely use trendlines for precise entries because:
-
The probability of a trendline being correct is only slightly higher than being wrong.
-
I focus on elements that significantly improve probability.
That said, if trendlines work for your system and deliver consistent profits, continue using them. Every trader is different—what works for one may not work for another.
Why You Should Be Careful with Trendlines
1. Trendlines Often Represent Only “Psychological Support/Resistance”
A trendline alone may serve as a psychological level rather than a technical barrier. Its reliability increases significantly when it coincides with an existing support or resistance zone.
-
Example: In an uptrend, the dashed green trendline marks rising lows.
-
Points 1 and 2: Only psychological support; less reliable
-
Point 3: Combines psychological support + previous technical support (old highs); probability of success is much higher
-
Insight: Using trendlines without combining them with technical support/resistance reduces accuracy.
2. Trendlines Do Not Provide Optimal Entry Points
Trading based solely on trendlines may lead to suboptimal entries:
-
Price may touch the trendline (point 2), you enter BUY, but it could drop to point 1 before rising.
-
Consequences:
-
Lower risk/reward ratio (Stop Loss longer, Take Profit shorter)
-
Psychological stress from temporary price violations
-
Erosion of confidence in trendlines, potentially abandoning a useful tool
-
3. Trendlines Can Mislead About Trend Reversals
Remember: Trend is confirmed by support/resistance levels, not just trendline breaks.
-
Price may break a trendline but only meet 50% of the reversal conditions. Traders may prematurely assume the trend has changed.
-
Real trend reversal occurs only when:
-
A new lower high (for downtrend) or higher low (for uptrend) is formed
-
Price decisively breaks old support/resistance with increased volume
-
Example: EUR/USD, H4 chart, October 10, 2018
-
Many traders may sell after price breaks the trendline and retests below it
-
In reality, the trend continues along the dashed green line until a confirmed reversal along the dashed red line occurs
Key Takeaways
-
Trendlines are useful visual tools, but do not rely on them alone.
-
Combine trendlines with:
-
Support and resistance zones
-
Overall trend direction
-
Volume analysis for confirmation
-
-
Exercise caution for entry/exit points; prioritize high-probability setups
Trendlines are helpful, but precision comes from combining multiple factors.
Conclusion:
Trendlines provide a framework for analyzing market direction, but they cannot guarantee success alone. Use them carefully, always in combination with trend, support/resistance, and probability analysis for better Forex trading results.
Thank you for reading and sharing. See you in the next article!
No comments:
Post a Comment