What is Trendline?
Trendline (trend line) is a fundamental tool in technical analysis. It highlights a trend or range of price movement.
If you know support and resistance are horizontal areas on the chart to represent potential buying and selling pressure, the same goes for trendlines, the concept is quite similar. The difference is that the trend line is diagonal.
Instead of looking at past performance and trading principles, analysts look for trends in price action. Trendline helps them analyze the direction and speed of market prices.
Describe it as the chart below:
Basically, the trendline can be divided into:
- An ascending trendline connects lower points to higher positions.
- A downtrend line is connected from higher points to lower positions.
How to draw Trendline
- Uptrend (trend to make higher lows)
- Downtrend (trend to make lower highs)
- The trend is sideways (Price is within a certain range).
The steeper the trendline, the stronger the trend. The stronger the trend, the less reliable it is because the trend is easy to break and form another trend.
A strong trend can be defined as: Price touches the trendline many times without breaking. (This is the same as support and resistance right).
With xu bullish (trendline up):
- The trendline is below the price.
- Need at least 2 points is 2 bottoms, the back bottom is higher than the previous one. If the price touches the trendline many times over a long period of time. This trendline represents the support level, where you can look for buying opportunities, or enter a long position.
- Putting it together will form an uptrend.
With a downtrend (Downtrend):
- The trendline is above the price.
- Need at least 2 points is 2 vertices, the latter vertex is lower than the previous vertex. If the price touches the trendline many times over a long period of time. This trendline represents resistance, where you can look for opportunities to sell, or enter a short position.
- Joining it together forms a downtrend.
Experience in identifying trendlines
Need 3 points to confirm a trend
As in the concept, just identify 2 high or low points and then connect them together and draw a trend line. However, to confirm it is a correct trend can take up to 3 points, this is also the advice of experienced analysts.
It can be explained as said: Because trendlines are like resistance and support levels.
- The steeper the trendline, the more network the trend is. The stronger the trend, the less reliable it is because the trend is easy to break and form another trend.
Use a higher timeframe
The purpose when using higher timeframes like (day, week, ...) will create reliability, ie a more certain prediction of the trend.
For example: The chart below in a trend in the daily timeframe. After the 2nd low is determined. The market formed a pin bar at the 3rd touch at this uptrend.
This is a buying opportunity for you, by looking for trendline support.
Also, when showing a trend on the weekly chart. This is believed to be an ideal time frame to execute potential opportunities.
Trendline is not a perfect straight line
Trendline when you draw is very rarely perfect in terms of: It connects from the highest or lowest level of the candle, or connects from the closing and opening prices of that candle.. This depends on the trend line.
It is very rare to draw a perfectly aligned trend line like the one I mentioned above. I will give an example for you to understand:
As you can see, the trendline above does not completely line up with the high of each candle, nor does it line up with the open or close of each candle.
This does not mean that the trendline is invalid. The special thing here is that the weekly chart above the price never closes above this level.
And the important trendline is to get the most touch points without cutting through part of the candle . If you see a trendline that cuts through the body of the candle, then the trendline may not be valid.
Don't try to draw a consistent trend line
The explanation is simple: If you try to draw a trendline and force it to fit the market, it is not a valid trendline.
This is a trick that newbies fall into most often. If it doesn't match then define another pattern.
Trendline strategy in trading
At the basic level, you can use two methods of trading with trendlines such as: Use when the price finds resistance or support at the trendline. Use when price breaks out of trendline (trend break).
Now let's go through each strategy:
Trend lines are support and resistance
If the trend line is acting as support or resistance. You can use this point when price returns to test the point where it hits the trendline you drew.
For example, you participate in margin trading and determine the trendline according to the chart:
At this point, the trendline acts as a resistance, then consider entering the order as follows:
- It is possible to do a short with entry when resistance is found at the trendline.
- Stoploss (stop loss) where: It is the point above the trend line
It's as simple as that, but the fact that you choose an entry and set a stoploss is entirely up to you.
This trendline breakout method is probably the most loved or used by everyone. Specifically, it helps you find potential market reversal points. You can judge by the chart below:
The chart above shows a market that broke support and then retested that trend making it look like a new level of resistance. This method uses breakout points to determine entry.
There are two ways to trade if this is the case (similar to breaking resistance):
Option 1: Short entry at the point when price breaks through the trendline and goes down. Stoploss is placed above the trend line.
Option 2: This is a caution for experienced traders.
This way waits for the trendline break and waits until the price crosses the trendline and then comes back to test and find resistance. When determining that the breakout is true, do a short entry. Stoploss is also placed above the trend line.
Be careful with trading strategies
As well as many other analytical tools. A trading strategy only helps you determine what you should do with this market, not giving you a specific profit or loss level. So you should combine many other tools such as MACD, Bollinger Bands, etc.
An example of this: For example, when you are trading a breakout and the trendline acts as a support level. When the new price moves below the trendline, you rush to place a short order there. In fact, the price goes back up immediately and you lose.
What are the lessons learned from the above example? That is, you should wait until the candle's close price is below the trendline or it comes back to test that support and forms resistance, then you should enter. The above example is similar to the trend line acting as resistance.
So you know it: A trend line should be connected by at least three highs or lows to make it valid. The more the price hits the trendline the higher the value is and use the trendline as support and resistance to trade.
Or the use of trendline breakout points also helps to improve profits. The rest of your problem is through applying it to practice and drawing yourself an effective trendline usage. Thanks!