What is a trend line?

In financial markets, trend lines are diagonal lines drawn on a chart. They connect specific data points, making it easier for chartists and traders to visualize price movements and identify market trends.

Trend lines are considered one of the most basic tools in technical analysis (TA). Trend lines are widely used in stock markets, fiat currencies, derivatives, and cryptocurrencies.

Essentially, trend lines act as support and resistance levels but are represented by diagonal lines instead of horizontal lines. As such, they can trend upward or downward. In general, the steeper the slope of the line, the stronger the trend.

We can divide trend lines into two basic types: upward (uptrend lines) and down (downtrend lines). An uptrend line is drawn from a point of lower position to a point of higher position on the chart. It connects two or more bottom points, as shown in the image below.

Conversely, a downtrend line is drawn from a point of higher position to a point of lower position in the chart. It connects two or more vertices.

In short, the difference between these two types of trend lines is the choice of points used to draw them. In an uptrend, the lines will be drawn using the lowest points in the chart (i.e. candlestick lows that form higher lows). On the other hand, downtrend lines are drawn using the highest values ​​(i.e. candlestick tops that form lower highs).

How to use trend lines

Based on chart highs and lows, trend lines show where price appears to temporarily go against the prevailing trend, tests it, and then returns in its favor. This line can then be extended to try and predict important future price levels. As long as the trend line is not broken, it is considered valid.

While trend lines can be used in all types of data charts, they are most commonly applied to financial charts (based on market prices). This means they can also provide insight into market supply and demand. Naturally, rising trend lines show increasing buying pressure (demand is higher than supply). The downtrend line shows a continuous decrease in price, indicating that buying pressure is decreasing (supply is higher than demand).

However, trading volume should also be taken into account when analyzing. For example, if prices are rising, but trading volumes are down or at a relatively low level, it's possible that demand isn't really growing.

As mentioned, trend lines are used to identify support and resistance levels, which are two basic but very important concepts of technical analysis. Uptrend lines show support levels below which prices are unlikely to decline. Conversely, a downtrend line highlights resistance levels above which the price is unlikely to rise.

In other words, a market trend can be considered invalid when support and resistance price levels are broken, either to the downside (for an uptrend line) or to the upside (for an uptrend line). decreasing direction). In many cases, when these key price levels fail to hold the trend, the market can change direction.

However, technical analysis is a subjective field and each person may have a different method for drawing trend lines. Therefore, it is possible to combine various TA techniques, as well as fundamental analysis, to reduce risk.

Draw trend lines

Technically, a trendline can be drawn from any two points in the chart. But most chartists would agree that using three or more points gives a trend line greater accuracy. Sometimes the first two points can be used to identify a potential trend, and the third point (future extension) is used to check the validity of the drawn trend line.

So, when the price touches the trend line three or more times without crossing it, the trend can be considered valid. Examining the trend line multiple times shows that the trend is not a coincidence due to price fluctuations.

Set up the scale

In addition to choosing enough points to create valid trendlines, it's important to consider the right settings when drawing them. Among the most important chart settings are the scale settings.

In financial charts, scale refers to how price changes are displayed. The two most common scales are arithmetic and semi-logarithmic. On an arithmetic chart, price changes are expressed evenly as prices move up or down the Y axis. Semilog charts show changes in percentages.

For example, on a numerology chart, a price increase from $5 to $10 will be shown by the same distance as a price increase from $120 to $125. However, on a semi-log chart, a 100% increase (from $5 to $10) would cover a larger space on the chart than a 4% increase in price from $120 to $125.

Scale settings should be considered when drawing trend lines. Each chart type can lead to different highs and lows and therefore different trend lines.

summary

Although they are useful tools for technical analysis, trend lines are not perfect. The accuracy of trend lines depends on the choice of points used to draw the trend lines, which makes them somewhat subjective.

For example, some chartists draw trend lines based on the body of a candlestick chart and ignore the wicks. Some people like to draw lines following the tops and bottoms of the wick.

Therefore, it is necessary to use trend lines in combination with other charting tools and indicators. Other popular TA indicators include Ichimoku Clouds, Bollinger Bands (BB), MACD, Stochastic RSI, RSI and moving averages.