Trendlines are straight lines that connect price points on a chart to identify and confirm trends. They serve as support and resistance levels in trending markets. In addition, traders can use trendlines to determine trend reversals and changes in the cryptocurrency market sentiment.
While trendlines are popular TA indicators, they aren’t foolproof. Various factors like FOMO, greed, or herd instinct can influence the market dynamics, potentially creating price movements that may not adhere to the trendlines. Therefore, traders tend to combine them with other TA tools, such as moving averages (MAs), Bollinger Bands (BB), or RSI to improve their chances of success and avoid relying on a single indicator.
Two common trendline types are uptrend lines and downtrend lines. Let’s take a closer look at how they are drawn and what they may indicate.
1. Uptrend lines are straight lines drawn diagonally by connecting two or more consecutive lows in an uptrend (see image below). They show areas of strong buying pressure where demand tends to exceed supply. If a cryptocurrency’s price bounces off the uptrend line, the bullish trend is likely to continue. A break of the uptrend line may indicate the start of a trend reversal.
2. Downtrend lines are straight lines drawn diagonally by connecting two or more consecutive highs in a downtrend (see image below). They show areas of strong selling pressure where supply tends to exceed demand. If the downtrend line withstands price touches without breaking, the present trend tends to continue. Its break is generally an indication of a potential trend reversal.
Learn more: Trend Lines Explained.