Trading Education

Simple Guide to Use Trendlines

Trendlines are one of the oldest technical indicators. They are used to identify and confirm the presence of price trends. They can be created on any time frame and any chart. The first step is to place a trendline on the chart. Visually, it is displayed as a straight line connecting two or more trend pivot points. 

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There are three main trends in the market:
1. Downtrend (bearish). This type of trend is identified by the price maximum. When the price of a currency peaks, the chart starts to go down. To determine the downward position of the line, one need to fix the highest point on the chart and draw the line to the minimum price. When the price starts to rise again, this phenomenon is called a breakout of the downtrend. can predict how the value of an asset will behave in relation to a currency or another asset, you can play short.

2. Uptrend (bullish). This kind of trend is determined by the minimum price. The minimum line position is highlighted and a line is drawn to the maximum price. When this line starts to decline again, it is called a breakout of the upward chart.

3. Sideways (flat). This phenomenon often occurs in a “calm” market, where the price of currency pairs is relatively stable. The chart has no signs of a sharp rise or fall, and the price changes by small amounts. When the market is calm, experts do not recommend opening an order, since it is very difficult to predict the movement of the chart in this case, unless you are a guru of technical and fundamental analysis. During this period, the market accumulates strength to move up or down.

Rules to Build a Trendline

  • Focus only on major pivot points (price pullbacks against the main movement) and ignore all others.
  • Connect at least two major pivot points.
  • Adjust the slope of your line in such a way that you get the most touches of the priceline of the chart, whether it is the shadows of the candlesticks or their bodies.
  • Building trendlines is a bit of a subjective process, so one can use any of these line drawing methods. 

How to Trade with Trendlines?

There are two ways:
  • Enter the market at a time when the price reaches the support or resistance line, running along the trend line
  • Enter the market when the price breaks the trendline

An aggressive trader opens a position the moment the candlestick breaks the trend line. The stop loss is placed on the other side of the trend line. Whereas a conservative trader waits for the price to break the trend line and test it on the other side as support or resistance. After the price has tested the trendline as resistance, it opens a "short" position and sets a stop loss on the other side of the trendline.

Closing line

Trendlines are a useful tool for technical analysis (TA), but they are far from the most reliable ones. The choice of points that will be used to determine the trend directly affects its correctness, which makes such lines a bit subjective. For example, some traders draw a trend line based on candlesticks, ignoring the shadows. Others, on the contrary, prefer to draw lines along with the shadows, following their highs and lows. For this reason, trendlines must be used in conjunction with other tools and indicators.

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