Trend Lines: Structural Reading

Igor Pereira · January 24, 2024

Trend Lines: The Structural Reading of Market Psychology

How to Use This Professional and Strategic Form Tool

By Igor Pereira
Financial Market Analyst
Founder of ExpertFX School

Among all the tools of technical analysis, trend lines occupy a strategic position. They are simple in appearance, but extremely deep when understood from the structural and behavioral perspective.

More than traces in the graph, trend lines represent the progressive balance between buyers and sellers.

Exclusive analysis for ExpertFX School — Igor Pereira:
“A trend line does not just show direction. It reveals where the market is defending value.”

In this article, you will have a complete and professional view of how to use trend lines with technical precision and strategic alignment.

What Are Trend Lines?

A trend line is drawn to connect:

Upstream funds (high trend)
Top descendants (low trend)

It represents the pace of the market.

In a high trend:
Buyers gradually enter higher levels.

In a downward trend:
Sellers press the price at lower and lower levels.

What's happening in the Bastidores?

Where the price complies with a trend line:

There is confluence of institutional orders;
There is structural defence of that level;
The flow remains dominant.

When the line is broken:

Balance begins to change;
Participants adjust positions;
The market can enter into transition.

In the XAU/USD, for example, structural disruptions often coincide with changes in the expectation of monetary policy or strengthening the dollar.

In general, it is advisable to wait for three confirmed contact points before starting to pay more attention to a trend line. Most traders make the mistake and connect the first two maximum or minimum and get overly excited when the price gets there again. However, a trend line is only confirmed if you get three contact points because you can always connect any two random points to your graphics. But when three contact points line up, it's no longer a coincidence.

The next question that always arises is whether you should use wicks or candle bodies to draw trend lines!? The answer is confluence. Whenever you get the best and most points of contact and confluence around your trend line, this is how you draw it. There are no fixed rules about whether the wicks or the bodies are better. Just look for a trend line that gives you more confirmation without being too violated. At the same time, consistency is also very important. You must define for yourself how to draw trend lines and always follow this approach to avoid noise. Below you see a screenshot with 2 possible trend lines and several touches each. After the third touch, the trend lines have been confirmed and you can see how I use the fuses and the bodies to insert the trend line.

The next question that arises is whether you draw trend lines connecting the minimums or the maximums. The answer is very direct: During a downward trend, I use the maxims and, during a high trend, I use the minimums to draw a trend line. This has two benefits: you can use the touches to enter into negotiations that follow trends and, when the trend line breaks, we can use this to negotiate reversals.

The inclination – or angle – of the trend lines immediately indicates how strong a trend is. A large angle in a lower trend line in a high trend means that the minimums are rising significantly fast and that the momentum is high. The screenshot below shows a high trend with increasing trend lines angles. The trend is gaining strength and the trend lines visualize it perfectly. Some people will call this the crash and impulse pattern when you realize that a trend is suddenly gaining even more strength and then the trend becomes unsustainable at a point.

The next screenshot shows the opposite: a downward trend with multiple trend lines showing decreasing angles. Obviously, the trend is losing strength

The screenshot below shows a primary downward trend as indicated by the red arrow. During the primary trend, one can start to look for weak consolidation phases and apply trend lines to these price movements. The low angle of trend lines indicates that consolidation does not have great chances of turning into a true high reversal. Sellers still keep pushing the price too close to the bottom of the movement, the highest minimums are very superficial and buyers cannot take control of the share of the price. Just wait until the trend line is broken and the downward trend is resumed. Of course, you will not always be able to draw a trend line, but if you can find one, they can be high probability trading settings.

There are some patterns in technical analysis that are based on the principles of trend lines. Wedge is very popular and we can apply our knowledge very well here. In the scenario below, the lower trend line indicates that the price is falling very slowly as the angle of the lower trend line is very shallow. This already shows that salesmen are not so strong in this market. In the end, before the strong reversal, the market gives a final push that ends as a false breakup. This pattern is also known as Bull/Bear trap. The two trend lines are also converging, which shows that the market is in a consolidation phase. Trend waves are getting smaller and smaller and the whole market is slowing down. During a wedge pattern, it is best to stand aside and not take up new positions. Once the trend line is broken up, the wedge is triggered and the high movement, which has already been indicated, can begin.