In trading, you can use many strategies and trading systems to get the maximum profit. Most of them are based on identifying a trend – the directional movement in the price of an asset. In implementing these strategies, traders are assisted by the construction of trend lines.
A trend line is an element of graphical analysis on a price chart; it is a line drawn between extremes in the direction of the trend. It can go down, up, or horizontally.
How to draw trend lines
To build a trend line, you need to have at least two highs or lows on the chart that are at different price levels.
An example of plotting a trend line on a downtrend
Candlesticks — body or shadows?
This is a frequently asked question for beginners, but there is no universal answer. Some traders draw trend lines on the bodies of candles, while others draw on their shadows. Important rule! You cannot simultaneously draw lines on both the shadows and bodies of candles. Such a trend line will be very unreliable.
Beginner Tips
Don’t plot trend lines on short chart intervals. Important! This is not about small timeframes but about the number of candles that the trend line touches. Don’t use too many lines, you’ll get confused. Graphical analysis is designed to make the chart easier to read, not the other way around.
How to trade trend lines
The main ways to trade with trend lines are:
- Opening a position at the moment when the price reaches the support or resistance line that runs along the trend line. On an uptrend, when the price approaches trend support, we should expect a bounce up and a continuation of the trend. But this is not a signal to buy, because we don’t know if the market will bounce or break out and the trend will end. In such situations, traders use other types of technical analysis (patterns, candlestick analysis, indicators) to help make a decision;
- Opening a position when the price breaks the trend line. On an uptrend, when the price breaks through the trend support and consolidates below it, we should expect the asset price to fall. In this case, it makes sense to open a short position;
- There are also strategies for adding and fixing positions based on trend lines. In an uptrend, as soon as the price touches the trend support level, many traders add volume to the open position. And when the price approaches the resistance of the trend, part of the position is sold. In a downtrend, the strategy will be implemented in reverse order.
Conclusion
Drawing trend lines is a subjective process. Trendlines are a useful tool for defining trend boundaries and finding entry points.
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