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The Complete Guide On How To Use Trendlines

Trendlines are one of my favorite trading tools because they allow us to explore market psycholgy and trends in many different ways and they are also universally applicable across timeframes, markets and market conditions.

In this article, I will give you a complete introduction to trendlines and how to use them in your trading. Below you can see a chart where I have drawn different trendlines and just to give you a first idea, we can get the following information from trendlines:

  • Is a trend losing or gaining strength? >> The trendline angle tells us that
  • Trendlines can be support and resistance
  • A break of a trendline after a trending period can be a meaningful signal

And now we’ll get into the details and I will explain how to do all that…

 

how to use trendlines
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How to draw and use trendlines 101

Generally speaking, it is advisable to wait for three confirmed points of contacts before you start putting further attention to a trendline. Most traders make the mistake and connect the first two highs or lows and then get overly excited once price gets there again. However, a trendline is only confirmed if you can get three points of contacts. Whereas connecting two random points is possible at any time at any chart, three points of contacts are no coincidence anymore.

The next question that always comes up is whether you should use the candle-wicks or the candle-bodies to draw the trendlines!? The answer is: confluence”. Whenever you get the best and the most contact points and confluence around your trendline, that’s how you draw it. There are no fixed rules about whether wicks or bodies are better. Just look for a trendline that gives you the most confirmation without beeing violated too much. Having said that, I don’t mind violations of just candle wicks as much as of candle bodies.

Below you see a screenshot with 2 possible trendlines and multiple touches. After the third touch, the trendlines have been confirmed and you can see how I use both the wicks and the bodies to get the trendline in.

 

 

Upper and lower trendlines

The next question that comes up is whether you draw trendlines connecting the lows or the highs. The answer is very straight forward:

During a downtrend, I use the highs and during an uptrend I use the lows to draw a trendline. This has two benefits: You can use the touches to get into trend-following trades and when the trendline breaks we can use that to trade reversals.

If you want to learn about trading professionally with trendlines, take a look at our pro area: Tradeciety Trading Academy
How to draw trendlines II
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The slope and angles of trendlines – trend strength

The slope – or the angle – of trendlines immediately tells you how strong a trend is.

A large angle on a lower trendline in an uptrend means that the lows are rising significantly fast and that the momentum is high. The screenshot below shows an uptrend with steadily increasing angles of trendlines. The trend is gaining momentum and the trendlines visualize it perfectly.

Some people will call this the bump and thrust pattern when you see that a trend is suddenly gaining even more strength and then the trend becomes unsustainable at one point.

The angle and slope of trendlines
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The next screenshot shows the opposite: a downtrend with multiple trendlines that show decreasing angles. Obviously, the trend is losing momentum.

 

The angle and slope of trendlines II
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Triangles are another common chart patterns and a triangle is made up of trendlines as well. In another article we explain how the angles in a triangle can tell you a lot about the sentiment.

 

The break of a market structure

Now we can slowly start putting it all together to make more sense of the charts. The screenshot below shows a market with several confirmed trendlines – all have more than 3 points of contacts as indicated by the green checkmarks.

Broken market strucure
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A trend is a market structure (other market structures are ranges or consolidations). The trendline confirms the trend market structure through validating higher lows. A break of a market structure is a break of a trendline. The screenshot below shows the always repeating market cycles:

Trend – trendline support – break of market structure – new trend – new trendline – break of resistance

The next screenshot shows a similar market behavior. The large red arrows show the longer-term trends. However, in the meantime, you can observe the short-term cycles repeating themselves over and over again; trend – break – new trend…

Market cycles
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Trendlines alone may not be sufficient as a stand-alone trading system, but they are a great addition in your arsenal and trendlines can help you interpret market structure on a whole new level.

If you want to learn about trading professionally with trendlines, take a look at our pro area: Tradeciety Trading Academy

 

The trendline-flip

When talking about trendlines we can’t miss the support-and-resistance-flip. This is a pattern which you can observe frequently and it is worth paying attention to. Trading is all about building confluence and stacking the odds in your favor and the trendline-flip is a great tool to build additional confluence.

The screenshot below shows when support turned into resistance and vice versa. The trendline flip is ideal for conservative traders who do not want to trade the initial breakout of a trendline, but are looking for additional confirmation.

Support turns resistance
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How to use trendlines – putting it all together

Trendlines are a universal trading tool and they offer different information. You can use trendlines in many different ways and we have summarized the most important facts about trendlines:

  • Always wait for 3 points of contacts to draw a valid trendline
  • It does not matter if you use candle bodies or wicks to draw trendlines
  • When drawing trendlines, there is no right or wrong. It has to make sense to you
  • The angle of a trendline shows how fast a trend is moving
  • Multiple trendlines in a trend provide information about slowing or gaining momentum
  • The market cycle of: trend – break – new trend can be observed using trendlines
  • The support and resistance flip is a pattern that can help you identify more accurate breakout signals

 

Image credit: tradingview.com

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