Trendlines and how to trade them
Trendlines are one of the simplest tools in technical analysis and about one of the most effective for price patterns since they form the building block for pattern identification and interpretations.
What is a trendline? – A trendline is a straight line connecting a series of ascending swing lows in a rising market or the top of descending series of swing highs in a falling market. The trendlines that are constructed by joining swing lows are called upward trendlines and those connecting swing highs are called downward trendlines.
How to draw trendlines: A downward trendline is constructed by joining the first swing high in a downtrend with another swing high. When price breaks above the trendline, a trend change signal is given. The upward trendline is drawn by joining the first swing low in an uptrend to another swing low. When the trendline is broken, a trend reversal signal is given. Notice how the trend reversed when the trendline above was broken.
We have said that in order to be a true trendline a line must connect two or more swing highs or lows, otherwise it is not significant. This is a fundamental point because a true trendline is a graphic way of representing the underlying trend.
Trendlines can be primary trendlines or secondary trendlines. The primary trendline connects the first top or bottom with the next swing point. If price then moves sharply, this could create a second trend within the primary trendline. Then we connect the first two swing points again to form the secondary trendline.
Trendlines can alert you to changing market conditions. How? By paying attention to the steepness of the trendline. If the trendline is getting flatter, it means the market is moving into a range condition. If the trendline is getting steeper, it means that the trend is getting stronger (or possibly going into a climax). Thus, you can be able to adjust your trading strategy accordingly.
Also, note that trendlines are not always diagonal. There are also horizontal trendlines and these are seen in the case of some price patterns such as head-and-shoulders pattern or the upper and lower boundaries of rectangles. When these lines are penetrated, they usually warn of a change in the trend as would the violation of upward or downward trendlines.
What is a trendline? – A trendline is a straight line connecting a series of ascending swing lows in a rising market or the top of descending series of swing highs in a falling market. The trendlines that are constructed by joining swing lows are called upward trendlines and those connecting swing highs are called downward trendlines.
How to draw trendlines: A downward trendline is constructed by joining the first swing high in a downtrend with another swing high. When price breaks above the trendline, a trend change signal is given. The upward trendline is drawn by joining the first swing low in an uptrend to another swing low. When the trendline is broken, a trend reversal signal is given. Notice how the trend reversed when the trendline above was broken.
We have said that in order to be a true trendline a line must connect two or more swing highs or lows, otherwise it is not significant. This is a fundamental point because a true trendline is a graphic way of representing the underlying trend.
Trendlines can be primary trendlines or secondary trendlines. The primary trendline connects the first top or bottom with the next swing point. If price then moves sharply, this could create a second trend within the primary trendline. Then we connect the first two swing points again to form the secondary trendline.
Trendlines can alert you to changing market conditions. How? By paying attention to the steepness of the trendline. If the trendline is getting flatter, it means the market is moving into a range condition. If the trendline is getting steeper, it means that the trend is getting stronger (or possibly going into a climax). Thus, you can be able to adjust your trading strategy accordingly.
Also, note that trendlines are not always diagonal. There are also horizontal trendlines and these are seen in the case of some price patterns such as head-and-shoulders pattern or the upper and lower boundaries of rectangles. When these lines are penetrated, they usually warn of a change in the trend as would the violation of upward or downward trendlines.
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