What is a trendline?
Trendline (trendline) is a basic tool in technical analysis. It highlights a trend or range of price movements.
If you know it support and resistance are the horizontal areas on the chart to show potential buying and selling pressure, as for the trendline, the concept is quite similar. The difference is that the trend line is diagonal.
Instead of looking at the effect of past trading and trading principles, analysts look for price action. Trendline helps them analyze the direction and speed of market prices.
Describe it as the chart below:
Basically, trendline can be divided into:
- The rising trendline links from lower points to higher positions.
- The decreasing trendline is connected from higher points to points with lower positions.
How to draw Trendline
The main trends
- Uptrend (tendency to make a higher bottom)
- Downward trend (trend of making lower peaks)
- The sideways trend (Price is in a certain range).
The steeper the trendline, the more that trend is. The stronger the trend, the lower the credibility because the trend is more likely to break and form another trend.
A strong trend can be defined as: Price hits the trend line multiple times without being broken. (This is similar to support and resistance.)
With xU trend increased (Trendline increased):
- The trendline is below the price.
- Need at least 2 points which are 2 bottoms, the bottom is higher than the previous bottom. If the price touches the trend line repeatedly for a long time. This trendline represents the support level, where you can look for buying opportunities, or long orders.
- Putting it together will create an uptrend.
With the downtrend (Trendline decreases):
- The trendline is on the price.
- Need at least 2 points as 2 vertices, lower peak is lower than previous peak. If the price touches the trend line repeatedly for a long time. This trendline represents the resistance level, where you can look for opportunities to sell, or on short orders.
- Putting it together creates a downtrend.
Experience in identifying trendlines
Need 3 points to confirm a trend
As in the concept, only define two high or low points and then connect them together and draw a trend line. However, to confirm that this is a right trend, it can take up to 2 points, this is the advice of experienced analysts.
It can be explained as saying: Because a trendline is like resistance and support.
- The more trendline the slope, the more that trend. The stronger the trend, the lower the credibility because the trend is more likely to break and form another trend.
Use a higher time frame
The purpose when using higher timeframes such as (day, week, ...) will create reliability, ie a more reliable prediction of the trend.
For example: Chart below in a trend in the daily time frame. After the 2nd low is determined. The market formed one pin bar at the 3rd touch on this uptrend.
This is a buying opportunity for the brothers, by looking for trendline support.
Also, when showing a trend on a weekly chart. This is arguably an ideal time frame for realizing potential opportunities.
Trendline is not a perfect line
Trendline when you draw is rarely perfect in terms of: It connects from the highest or lowest of the candle, or connected from the opening and closing prices of that candle.. This depends on the trendline.
It is very rare to draw a perfect trendline like you said above. I will give you an example to understand:
You see that the above trend line is not completely aligned with the high of each candle, nor does it line up open or close each candle.
This does not mean that the trendline is invalid. What's special here is that the weekly chart above the price never closes above this level.
And the most important trendline is to get the most touches without crossing a part of the candle. If a trendline cuts through the real body, the trendline may be invalid.
Do not try to draw a suitable trend line
Explaining this is simple: If you try to draw a trendline and force it to fit the market, it is not a valid trend line.
This is a trick that newbies most often stick. If it does not match, then determine another pattern.
Trend line strategy in trading
At a basic level, you can use two trading methods with the trendline: Use when prices find resistance or support at the trendline. Use when the price breaks out of the trend line (break the trend).
Now go with each strategy:
The trend line is a support of resistance
If the trend line is acting as a support or resistance. You can use this point when the price returns to the test point where it hits the trendline you drew.
For example, you participate in typing margin and determine the trendline according to the chart:
Now that the trendline is acting as a resistance, then you consider the order as follows:
- It is possible to make a Short command with an entry when finding resistance at the trendline.
- Stoploss (stop loss) where: It is the point located on the trend line
It's as simple as that you choose the entry and place the stoploss completely by yourself.
This method of breaking the trend line is probably the favorite or it is most often used by people. Specifically, it helps you find potential reversals of the market. Can be assessed through the chart below:
The chart above is a market that broke through support and then the price turned up to retest that trend making it look like a new resistance level. This method uses breakout points to determine entry into the command.
There are two ways to trade if this is the case (similar to breaking the resistance):
Option 1: Short the entry at the point when the price crosses the trend line and descends. Stoploss is placed on the trend line.
Option 2: This is a prudence for experienced traders.
This way, wait to break the trend line and wait until the price crosses the trend line and then return to test and find resistance. When determining if the breakout is correct, do a short entry. Stoploss is also placed above the trend line.
Beware of trading strategies
As with many other analytical tools. Trading strategies only help you determine what you should do with this market, not give you a specific level of profit and loss. So you should combine many other tools like MACD, Bollinger bands, etc.
An example of this: For example, when you are trading on 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 up immediately and you lose.
What is the experience drawn from the above example? That is, you should wait until the price closes below the trendline or it returns to test that support and form a resistance, then you should enter the order. The above example is similar to the trend line acting as a resistance.
So you've learned that: A trend line should be connected by at least three highs or lows to make it valid. The more the price touches the trendline, the higher the value and uses the trendline as a support and resistance to trade.
Or using breakout trendline points also helps to improve profits. The rest of your problem is through applying into practice and drawing yourself an effective trendline use. Thanks!