Trend lines are one of the basic yet essential elements on a price chart in technical analysis. As the name is self-explanatory, trend lines depict the trend of the price of the security being analyzed.
Using trend lines, traders are able to gauge the trend or the direction of the price. This can give some valuable information such as knowing which way the majority of the market is positioned.
Trends are formed across all time frames. For example, if you see an uptrend on the daily chart, then scaling to the lower time frame chart, you can see either the same uptrend or a counter trend such as downtrend.
Prices tend to move in a trend by constantly correcting itself, although the majority trend still prevails.
For years, traders have been using various tools in order to ascertain the trend in the price chart. There are many ways to do this. For example, using technical indicators such as moving averages, or price channels, one can observe the trends in the price.
Likewise, there are also price action or chart patterns-based methods that can be used to ascertain the trends in the price of security.
Among these tools, the trend line is one of the most important tools available for traders to gauge and draw the trend lines in the price chart.
Trends are important in the market when analyzing the price of a security. It can tell you how you want to trade. Traders usually trade either in the direction of the trend or wait for a correction and enter during a dip in a rally or a rally in a downtrend, or some simply trade the counter-trend positions in the markets.
Regardless of which way you trade, the trend forms the basis for your trading in the markets.
How to draw a trend line?
As you previously read, there are two types of trends: the uptrend and a downtrend.
In an uptrend, the trend line is sloping upwards from the bottom left side of your chart to the upper top right-hand corner. This is also known as a rising trend line. To draw the trend line, you start looking at the price and pick the key lows in the trend.
Remember that the lows formed should be higher compared to the previous one.
In a downtrend, the trend line is sloping downward from the upper left-hand corner to the bottom right hand corner. This is also known as a falling trend line. A falling trend line is drawn by connecting the lower highs in the downtrend.
Trend lines usually slope at an angle of 45 degrees. You will of course come across trend lines that are inclined in a higher slope. However, for the majority, trend lines are usually gradual in their slope.
Ideally, a trend line should be tested three times for it to be valid. However, this is something that you will not see in many markets. For example, in the forex markets, it is widely accepted that a trend line that is tested twice is sufficient for plotting the trend lines.
The chart below in figure 1 shows a rising trend line. In the below chart, we make use of the bar chart and look at the lows that are formed to draw the rising trend line.
Figure 1: Drawing a rising trend line
After points 1 and 2 are connected, let’s see how the trend line emerged.
Figure 2: Rising trend line being tested
In figure 2, you can see that after plotting the trend line, price falls back to the trend line and tests the trend line before bouncing off again.
However, this is not always the case. Sometimes price can just break the trend line without testing it for the third time. Let’s look at the example of a falling trend line depicting a downtrend in the next chart below.
Figure 3: Falling trend line
In the above case, after plotting the falling trend line, you can see that price just breaks the trend line, only to retest it after breaking out from the trend line. This is normal.
Advanced trading with trend lines
There is a day trading system called V-Power that can be traded with trend lines. The V-Power system gives you even the possibility to day trade besides your normal job.
Tips to remember about trend lines
- Trend lines show you the current trend in the market. It is relative to the time frame that you are looking at. Therefore, on a daily time frame, you can see a rising trend line but on a H1 time frame, you can see a falling trend line.
- Trend lines tend to usually slope at an angle of 45 degrees. You can also draw trend lines that have an acute slope. However, such trend lines are short term in nature, and they can be easily breached or broken.
To conclude, drawing trend lines is one of the easiest thing to learn in technical analysis. Trend lines are beautiful, and they give a lot of valuable information. The best way to learn to draw trend lines is to move back your chart to some old period and then draw the trend lines.
This way you would be able to see how price respects the trend line and how it behaved as price progressed.