The lines that we draw at an angle above or below the price are trend lines. These lines are used for giving indications if any trend is immediate. Moreover, they also indicate whether the trend has changed or not. These lines are used as resistance and support and they provide opportunities for both open and close positions. How to draw trend lines? Well, we are going to tell you in this article.
How to Draw Trend Lines – A brief discussion
If you want to draw the trend lines in any downtrend then you will draw them above the price. Similarly, when you want to express the uptrend, then you will draw them below the price. For downtrends, it is high and for uptrend it is low.
If you want to draw a trend line, you need to draw at least two swings high or two swings low in either direction.
But if you want to make the trend line to be valid. Then you must use at least three highs or lows. So, if more price touches a trend line, the more valid it will become. The reason behind this is that there are more traders that use them as support or for resistance.
Using Bodies of Candlesticks or Wicks and How to Draw Trend Lines?
For drawing the trend lines, most traders use several options. Some of them use the body of candlesticks. While others prefer to draw with wicks.
The trend lines have no issue with drawing unless or until you are comfortable with what you are using. But the main thing you must keep in mind does not deviate from the method that you use.
Using Trend Lines for Trading
Particularly, there are two main methods by which you can trade the trend lines. Below are the methods;
Entering when any price finds the resistance or support at the trend line
Entering when any price breaks through the trend line
Trend line as resistance or support
If you have identified a trend line and it holds as resistance or support. Then you can easily use the trend line for entering into the market once the price comes back in trend.
Trend line break
In the method of the trend line break, the actual method is used. The breakout of the line for determining any entry takes place. When any price starts breaking through a trend line. Then it is no longer valid as resistance or support. Moreover, it is likely that the price continues in the reverse direction.
There are normally two ways for entering with the use of a trend line break. It is either an aggressive entry or a conservative entry.
How to make trend lines using an aggressive entry?
For entering a trend line break, the aggressive way is to enter as soon as candle breakthrough. Moreover, it closes on the other side of the trend line.
Here two things normally take place:
Short entry just after the price breaks through the trend line to the downside
Stop-loss places over the trend line
A conservative entry
Waiting until the price breaks through is the more conservative way to trade the trend line. Then test it from the other side as either resistance or support. Below are a few considerations in such a scenario:
The prices breakthrough any trend line to the downside
You must wait for prices to come back to the trend line, then find the resistance
After you determine that the breakout is true, then enter into short entry
You must place a stop loss above trend lines.
Caution using trend line breaks
If you are willing to trade a breakout of the trend line. Then it is the best thing that you must wait until, on another side, the candlestick actually closes. It can close as either resistance or support. If the close on the other side does not happen, it is not considered as an actual break.
False breakout
Sometimes the price moves below the trend line. However, you can retrace and can close the candlestick above the trendline.
What Is the Utility of Trendline?
Among technical analysts, brokers, and traders, uptrends, and downtrends are very hot topics. The reason is that they ensure that the underlying market conditions work in favor of the position of the trader. In spite of working against it.
The trendline is easy to recognize lines that most traders draw on the charts for connecting a series of prices together.
The line that you get in result will give you the idea of the direction in which the investment will give more benefit. You have read about How to Draw Trend Lines, but know, we will discuss in detail.
Understanding the direction of Trendline
Understanding the direction of any underlying trend is most important and also the basic way for increasing the probability to make a successful trade. The reason is that it ensures that the general market forces work in the favor of a trader.
If there are downward sloping trendlines, then they suggest that there is an excess amount of security supply. It is a major sign showing that the market participant is having a higher willingness for selling an asset and then buy that asset.
If there is a downward sloping trendline present, then you must refrain to hold a long position. You must also know that there is a proper series of lower lows and also lower highs, and it is a confirmed downtrend hallmark. Whereas, an uptrend is a signal that the demand of any asset is great than that of the supply.
The trendlines depend upon the time frame that is used and the slope of the line.
Resistance and Support in Trendlines
When we talk about trendlines, they are the simple tools that we use to gauge the overall direction of any given asset. But the most important thing is that the traders can also use them. They use them to help in predicting areas of support and resistance.
This thing means that they use trend lines for identifying the levels on a chart beyond which the price of any asset will have a difficult time moving. The information stands to be very important and also useful for the traders who look for strategic entry levels. Or they can use for effective risk management.
The technical traders pay a lot of attention in detail to an asset when the price starts approaching a trendline. The reason is that these areas play a very important role to determine the short-term direction of the price of assets.
Draw Your Own Trendlines
Trendlines are simple lines as we told you. They connect a series of prices for giving the trader a better idea of where the prices will head in the future of any investments. The problem occurs when you have to choose the prices. The question here is which price you must choose. But right after you choose the prices, it becomes easy for making trendlines.
Conclusion on How to Draw Trend Lines
Traders use the trendlines for seeking and ensuring that the trend of any asset is in working favor or not. Most of them know How to Draw Trend Lines. These are an effective and easy gauge to know where trends is lying.