One of the most common sayings you will here in the markets is, “The trend is your friend.” In the financial markets, of those watching and trading the markets, the vast majority tend to be followers, not leaders. Like a flock of sheep there will be one or two rams locking horns in order to lead, however the rest will happily follow in whatever direction they are led. Very few of us want to stick out heads above the parapet.
If a trader is able to predict what this direction is likely to be then he has the opportunity to take advantage of this herd mentality. One of the best ways to do this is to follow trend lines. If you look at binary trading charts then you will have observed that all markets trade in waves, involving peaks and troughs. Sometimes these waves will trend upwards creating higher peaks and higher trough as they go. Other times these waves will trend downwards, creating lower troughs and lower peaks as they go. There are also the times when a market will trade sideways, with the peaks and trough maintaining similar levels over a particular period. By identifying these trends and creating trend lines, we can predict how they will continue in the future.
How to Draw a Trend Line
In order to draw a trend line we first need to identify the direction of the trend. If the trend is upwards, we draw a straight line connecting the ascending troughs of the wave. We then extend that line into the future, knowing that as the trend continues the price will bounce up, off of the price points on our trend line where the troughs are expected to appear in the future. Conversely, if the trend is downwards, we draw a straight line connecting the descending peaks of the wave. We then extend the line into the future, knowing that as the down trend continues, the price will bounce down off the price points on our trend line where we expect the peaks to form in the future.
Once these trend lines have been established we are able to establish a trading strategy which takes advantage of these trends, where we set our trades to take advantage of these bounces off the trend lines. We are able to recognize a break out in direction of the market where the price breaks through our trend lines, signalling a fundamental change in direction of the current trend.
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