The trendline is one of the simplest yet useful tool in trading. Trendlines are important in identifying trends as well as identifying market patterns. A trendline can be identified by drawing two or more highs or two or more lows, with the lines extending into the future.
To draw a trendline correctly, sometimes you will have to experiment numerous times in order to find the correct one. You want to connect at least two highs or two lows.
For a trendline to be drawn on an uptrend, first find two lows. After identifying two lows, use the trendline tool to connect the two lows together, and extend the trendline into the future price.
A trendline that is drawn in an uptrend is shown in the image above. Points 1 and 2 are connected together initially with the trendline tool before extending the trendline into the future. Points 3, 4, and 5 are potential buy setups that you could place when price approaches the trendline.
A trendline that is drawn in a downtrend is shown in the figure above. Points 1 and 2 are connected together initially with the trendline tool before extending the trendline into the future. Points 3, 4, and 5 are potential sell setups that you could place when price approaches the trendline.
A trend in motion will tend to stay in motion. Once it finds a certain slope, identified by the first two high/low, it will usually remain in the same slope. The trendlines will help us determine whether that trend is changing.
In an uptrend, the trendline acts as a support line for traders. Since many traders use trendlines, the trendline provides a support line where many traders will place buy orders. The downtrend line can also be used as a resistance line for placing sell orders.
When you’re drawing the trendlines, draw them from wick to wick. Starting from the wick of the starting point, draw the trendline and angle it towards the wick of the second point. Extend the line into the future and look for potential reversals.
Trendlines can occur on different timeframes. When drawing trendlines, take into account that there are smaller trends within bigger trends. The trendline with the longest time duration will hold the most significance overall.
When price is on an up trendline for a period of time, it will, most of the times, eventually break it. In the figure shown above, we see an up trendline acting as a support being broken. Then price retested on the same trendline, now acting as a resistance, and went lower. This is an example of an uptrend switching to a downtrend through the breakout of a trendline.
The same is true for a downtrend. When the trendline is broken for a downtrend, it will most likely rally to the upside.
In the example above, you can see two trendlines occurring at two different trends. We have the first trendline being an uptrend line and the second one being a downtrend line. When the bearish candlestick formed below the first trendline, it is considered as a breakout candle. Therefore, the support trendline is now broken. When the bullish candlestick formed above the second trendline, it is also considered as a breakout candle, and therefore, the resistance trendline is broken as well.
When price breaks out of a trendline, the targets you will be aiming for will be where price touched the trendline, with the origin price being the final target.
On the images above, price breaks through the trendline. You can enter after the breakout candle or wait for a retest and set your profit targets where price touched the trendline as shown. Your final take profit will be where the trendline started. Usually after price reaches this, price will do a reversal.
When you start drawing your trendlines, it is best to start off with the weekly, then go down into consecutive lower time frames. From weekly, move down to daily, then move down to 4H, then down to 2H or 1H.
As we go through different timeframes, we can see how each trendline reacts to price.
Looking through the example above, we started off with the weekly and moved all the way down into the 1H where we were able to have a clear entry.
Utilize this tool into your trading and see how well it works for you.