how to draw trend lines

What are Trend lines? How to Draw trend lines?

 

 

In the previous article, we studied the different types of markets. We learned about the ranging markets and trending markets. In this article, I will tell what a trendline is and what is the significance of a trendline and how to draw a trend lines .

The trendline is the most commonly used tool in trading, let it be forex trading or stock trading, a trendline is a tool which almost every trader uses or has used in his trading career. It is essential for a swing trader or day trader to be able to draw a trendline with accuracy, but what’s most important is to understand the psychology behind trendline. I feel if you know the concept of anything, then it becomes much easier for you to use it.

So, let us first try to understand what is a trendline and what is the exact concept behind it, and then I will tell you how to draw a trendline accurately.

WHAT IS TRENDLINE?

A trendline is a tool used by the traders to find out the direction of the price.

A trendline is a line drawn by connecting the swing highs or the swing lows to find the exact direction of the trend.

Let us try to understand how a trendline forms.

Consider the price is in an up-trending market, so this means that the buyers are in control of the market, and they are causing the price to move up. Now, while the price is moving up, sooner or later, a point will come where few buyers will take profit and get out of the trade and new sellers will enter?

Consider this point at which the buyers take profit as your higher high.

Now as some buyers got out of the trade and some sellers came in, it will create a counterpressure and hence will cause the price to retrace and therefore will create a new higher low. After this retracement, if the price continues to move back up, this means that there still aren’t enough sellers to take away the momentum from the buyers and so it will move past the previous higher high and hence create a new higher high. Again some buyers will take profit and cause the price to retrace creating a new higher low.

So, now in an up-trending market when you connect these higher lows through a line, then it forms a trendline.

The trendline formed here acts as verticle support for the price, and the buyers have a strong belief that the price is going to reverse from this line, so anytime it touches the trendline new buyers adds up, and the price bounces back up.

How and why does a trendline break and what happens after the trendline breaks?

Now, if this trendline was acting as strong vertical support for the buyers, then why did the price broke through the trendline?

It happens because the gap between the buyers and sellers gets covered as many sellers get into the trade; this causes the momentum to shift from buyers to the sellers.

When the price breaks the trendline, it signals the momentum change and massive shift in the balance of the parties controlling the market. Therefore when the price breaks a trendline, it continues to move in the direction in which it broke the trendline.

How to know if there has been a shift in the balance of parties or change in momentum? (before the trendline breaks)

When the price is in a trending market, you will observe that the price moves in a very symmetrical (similar) pattern. So, when there is a change in momentum of the market, you will find that the symmetrical pattern in which the price was moving is changing and the price is no longer moving in a similar pattern in which it was moving before. So, this is a good indication for us to get prepared and see if the trendline breaks.

LET US TRY TO UNDERSTAND THIS WITH THE HELP OF AN EXAMPLE.

what is a trend line

In the example above the price was in an up-trending market. The price was moving in a symmetrical(similar) pattern and creating HH and HL.

So, after the third HH, the price changed its movement pattern i.e., it couldn’t make any new higher high and also gave a sign of sellers entering the market.

It indicated that there is a change in the momentum of the market, and after that, the price broke through the trendline, which was acting as verticle support.

HOW TO DRAW TRENDLINES?

Drawing trendlines is an effortless task to do. Depending upon the type of market, you can draw trendlines by connecting the swing points properly. Here is how to draw trend lines.

Trendline for up-trending market

how to draw trend lines
how to draw trend lines

1) The trendline drawn in an up-trending market is an ascending trendline.

2) For the up-trending market, the trend line is drawn below the price.

3) The trendline is drawn by connecting all the higher lows in an up-trending market.

4) For a trendline to be valid, you need at least 2 touch confirmations.

5) To draw trendline accurately, make sure you also cover the wick of the candle.

Trendline for down-trending market

how to draw trend lines

1) The trendline drawn in a down-trending market is a descending trendline.

2) For the down-trending market, the trend line is drawn above the price.

3) The trendline is drawn by connecting all the Lower highs in a down-trending market.

4) For a trendline to be valid, you need at least two touch confirmations.

5) To draw trendline accurately, make sure you also cover the wick of the candle.

 

 

 

Leave a Comment

en_USEnglish
fr_FRFrançais en_USEnglish