Connecting these lows with a line results in an ascending trendline, showing you that the prices are trending upwards.

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A trendline can also be drawn along the individual swing highs. This shows the angle of ascent, the strength of the price move, and the relative strength of the trend. When the price falls, the swing highs fall. Connecting these highs with a line results in a descending trendline, illustrating the downward trend. A trendline can also be drawn along the swing lows. Typically, you would have more than just one trendline in play. At any given moment you could draw many trendlines, all showing the price movement over various periods of time.

What to Avoid When Trading Trendlines

Trendlines at very steep angles typically have a short life, since prices cannot sustain a near-vertical rise or fall for long. That said, drawing trendlines whenever possible can aid new traders in spotting the overall trend, while also highlighting small trends and corrections within that overall trend. During an uptrend, buying or going long opportunities may occur when a short-term downtrend meets the overall ascending trendline. During a downtrend, selling or shorting opportunities may occur when a short-term uptrend meets the overall descending trendline.

Once drawn, trendlines often need to be adjusted. Prices don't usually move in a uniform fashion, and since trendlines account for both time and price, they move along the price and time axis. This means that any acceleration or deceleration of the trend requires adjustments to the trendline. Trendlines work as a tool, and can't be relied on solely. To decide whether a trendline should be adjusted, or whether it has been definitely broken , consider how the price moves within a trend.

What Are Trend Lines Really Used For in Technical Analysis?

During an uptrend, the price makes higher highs and higher lows. As long as that keeps occurring, if the price moves below the trendline it doesn't necessarily mean the trend has ended, the line may just need to be adjusted. During a downtrend, the price makes lower lows and lower highs. As long as that happens, if the price moves above the descending trendline it doesn't necessarily mean the trend has ended, the trendline might simply need to be adjusted.

The need for constant adjusting makes a trendline imprecise for use as a trade signal. Also, consider that a trendline drawn at a slightly different angle can make a big difference in what price that trendline intersects with. Therefore, while you can use trendlines as a guide, use more precise criteria for entering a trade, such as a move back in the trending direction, an engulfing pattern where the next bar is larger than the previous one, engulfing it , or an indicator that adjusts more precisely and quickly to changes in volatility.

If you use trendlines as just a guide, then you don't need to worry about drawing trendlines along the exact highs or lows.

Trendline Trading Strategies – Breakouts and Reversals

Draw "trendlines of best fit. In some cases drawing trendlines along extreme highs and lows works, but when it doesn't, draw trendlines of best fit. Since the trendline isn't being used as a trade signal, it still provides you with relevant information about the trend, without the need to constantly readjust it. Trendlines are a great tool, showcasing short-term trends within the overall trend.

Pay attention to price action and always consider it when using trendlines. Many traders are confused as to whether they should draw the lines at closing price highs and lows or the highs and lows of a particular period. They are confused as to whether the lines should be adjusted to account for spikes in the data, whether spikes in the data should be ignored or whether trend lines should be adjusted to the scale of the chart.

Advocates of trend lines use more sophisticated trend line channels. These channels connect the lows of price actions on one side and the highs of price actions on the other side and a purchase is made at or near the support trend line and a sale at the line of resistance. The objective is to buy cheap and sell at profit several times over the length of a price action.

This can very profitable so long as price remains within the chosen channel. Should the price break out of the channel, traders need to make consideration for several factors and establish parameters for their measurements. Most Popular.

trend lines: How to form trading rules based on trend lines - The Economic Times

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