How to Draw Trend Lines and Channels on XAUUSD Trading Charts
Sometimes support and resistance levels are formed diagonally in a similar way like a staircase. This forms a price trend which is a sustained movement in one direction either upwards or downwards.
This trend can be depicted by a trend line.
A trend line depicts points of support and resistance for the price, depending on the direction of the market prices. For an upward moving market a trend line will show the points of support and for a downwards market the trend line will show areas of resistance. Trend lines are mainly used by investors to determine these points of support and resistance.
A Trend Line is a straight line that connects two or more price points and then extends into the future to act as a level of support or resistance.
There are two types of trend lines: upward trend line and downward trend line. Trend line is an aspect of technical analysis that uses line studies to try and predict where the next price move is likely to head to.
A trader wanting to trade Gold metal online using technical analysis must know how to draw and interpret the trading signals generated by this trend line trading tool.
Trend line analysis is based upon the idea that the market prices of Gold move in trends. The trend lines show three things about the current market trend, these are:
- The general direction of the market - whether up or down
- The strength of the current move
- Where future support and resistance points will likely be located
If a trend line forms in a particular direction, then the market usually moves in that direction for a period of time until the time when this trend is broken. When the trend is broken the trend line will also be broken - meaning price will move below an upward trend line or above a downward trend line.
Plotting trend lines on Gold charts shows the general trend of the Gold prices - which can either be upward or downward.
The example below show how to draw trend lines:
Upward Trend Line
Upward Trend Line - Upward Trend of Gold Prices
Downward Trend Line
Downward Trend Line - Downward Trend of Gold Prices
Drawing Trend Lines on XAUUSD Trading Charts Using MetaTrader 4 Platform
The MetaTrader 4 Gold trading platform software provide technical charting tools for drawing these trend lines on the Gold trading charts. Gold traders can use the drawing tools provided on the MetaTrader 4 software as shown below to draw these trend lines.
MetaTrader 4 Platform Trend Line Drawing Tool
To plot trend lines on a Gold trading chart just click the line drawing tool shown above on the MetaTrader 4 technical analysis software and select point A where you want to start drawing the line and then point B where you want the it to touch. You can also right click on the trend line and after right clicking on it, on the "properties" option select the option to extend its ray by ticking the "ray check box", if you do not want to extend it, then uncheck this option in your MetaTrader 4 platform. You can also change other properties such as color and width of the trend line on this property settings popup window.
"The trend is your friend". Is a popular saying among investors because you should never go against the trend. The trend is the most reliable method to trade Gold prices because once prices start to move in one direction they can move in that particular direction for quite some time - therefore using this method presents you with the best chances to make profits from the online Gold metal trading market.
Principles of How to Draw Trend Lines
- Use candlestick charts to draw trend lines
- The points used to draw the trend lines are along the lows of the price bars in an upward trend market. An upward bullish moving trend is defined by higher highs and higher lows.
- The points used to draw are along the highs of the price bars in a downward trend market. A downward bullish move is defined by lower highs and lower lows.
- The points used to plot trend lines are extremes points - the high or the low price. These extreme points are important because a close beyond the extreme tells investors and traders that the trend of the Gold metal prices might be changing. This is interpreted as an entry or an exit signal.
- The more often a trend line is hit but not broken, the more powerful its trading signal is.
There are two main ways of trading this setup:
- The Bounce
- The Break
Technical Analysis of These Two Methods
The trend line bounce is a continuation signal where price bounces off this trend line and continue moving in the same direction as the trend line.
In an upward trend move, the market will bounce upwards after hitting this level which is the support level.
In a downward trend move, the market will bounce downwards after hitting this level which is the resistance level.
The trend line break is a reversal signal where the market goes through the trend line and starts moving in the opposite direction.
When an uptrend is broken then the sentiment of the market reverses and becomes bearish
When a downtrend is broken then the sentiment of the market reverses and becomes bullish
For very strong trends, after this trend line break signal, the price will consolidate for some time before moving in the opposite direction. For short term trends then this trend line break signal will mean price may reverse immediately.
In Gold metal trading, both the trend line bounce and the trend line break that are used in technical analysis charts are based upon these levels being support and resistance levels.
Using Trend Lines as Entry Signals, Exit Signals and For Setting Stops:
This trend line trading method is used to determine good entry and exit points for opening and closing Gold trades, protective stops are placed just below or above these trend lines. The trend line bounce is a low-risk entry method used by investors and traders to place entry trades after price has retraced but the price is still within the trend direction. Trades are setup along these trend line levels and a stop loss placed just above or below the trend line.
The trend line break is a crucial indicator of possible price trend reversal. When a trend line is broken the price starts move in the opposite direction. This provides an early exit signal for investors and traders to exit their open trades and take profits. When there is a penetration of these trend line levels, it is a signal that the price may reverse start moving in the opposite direction.
Unlike other technical analysis indicators there is no formula used to calculate trend lines, this trend line formation is just drawn between two chart points and a trader has to learn how to draw these trend lines on their Gold metal trading charts.