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