A lot of traders apply trend lines for trading and making predictions on different financial markets.
Trend line can also be an important element of price action patterns.
However, only few knows that some trend lines are better to be avoided.
In this article, I will share with you the types of trend lines that you should avoid and not rely on for making trading decisions.
Invalidated Trend Line
Even the strongest trend lines may lose their significance with time.
Before you take a trade from a trend line, make sure that it still remains valid.
If the trend line is not respected by the buyers and then by the sellers,
OR by the sellers and then by the buyers, we say that such a trend line lost its significance, and it is better to not trade it.
Have a look at that rising trend line on USDCAD.
We see strong bullish reactions to that, and we may expect a bullish movement from that, once it is tested.
However, it was violated and after a breakout it should turn into a vertical resistance.
Retesting that, the price easily went through the broken trend line.
The trend line lost its significance, and it is better to not trade that in future.
2 Touches Based Trend Line
When you are looking for a strong trend line to trade, remember that the trend line should be confirmed by at least 3 touches and 3 consequent bullish / bearish reactions to that.
Above is the example of a valid and reliable trend line.
However, quite often, newbie trade 2 touches based trend lines.
Most of the time, such trend lines are neglected by the market.
Moreover, relying on 2-touches-based trend lines, your chart will look like a complete mess.
Simply because there are too many trend line meeting that criteria.
Receding trend line
There are the trend lines that go against your trade with time while remaining valid.
Have a look at a major falling trend line on NZDCHF on a daily time frame.
You may open a swing long position from that on a daily or a day trade on intraday time frames like an hourly.
You can see that the market may easily go against your predictions for a long time, while perfectly respecting a trend line.
The price was sliding on that trend line for 6 consequent days before it finally started to grow.
Such trend lines are better to be avoided.
Make sure that a trend line and your trade have the same direction.
Trend lines can provide very safe points for trading entries. However, the trend lines are not equal and while some of them can be very profitable, some of them can lead to substantial losses.