The trend line is one of the technical drawings that investors use when trading in financial markets. We will examine in detail in our article ‘What are trend drawings, how to draw a trendline’, which is very successful in predicting the future direction of prices.
In order to make the trend line in the most accurate way, the subject of ‘what is the trend’ should be mentioned first. Knowing what the word trend means allows us to draw more successfully when using it. Therefore, before moving on to drawings on the graph, it is necessary to read and understand the definition in the most accurate way.
What is a Trendline?
An upward or downward sloping market, where the price is gradually rising, is called a trend. Showing these slopes as straight lines on the chart is called a trend line. trend lines; It is expressed as a buying (up) or selling (down) trend. Pivot levels are used when drawing a trend line.
We talked about what the pivot levels are in our previous article. What is a Missed Pivot Point? Check out our article. The trend line is drawn above or below the relevant pivot levels to show the current price direction. These lines are visual representations of support and resistance. It also allows us to identify patterns while showing the direction of the price.
Things to Consider in Trendline Draw
- Trends can be represented by channel lines as well as by one-way lines.
- A trend is believed to continue unless there is a clear signal that it will reverse.
- A line drawn over any two tops (ceilings) or lows (bottoms) on a chart is a clue that the market is going into a trend.
- Such lines can be used to identify where support or resistance points should be to confirm the trend.
- Different traders can create different trend lines on the same chart. Trend lines can be formed from the body ends of the candles in the candlestick chart, as well as from the wick ends of the candles.
- For a trend to occur, the lines must touch at least 3 points.
- The distance between the 3 selected points should not be too short or long.
- When connecting 3 points, care should be taken not to overflow. (Some long-term trends may momentarily sag outside the trend line.)
- Momentary jumps outside the trend line do not indicate the end of the trend.
- According to the chart viewed in trend formations, small trends may occur within the main trend.
- The trend lines touching as many points as possible show the strength of that trend.
- The longer the trend lines continue without breaking, the greater the confidence in the trend and the strength of the trend.
- If the increase in the slope of the trend lines is high, that is, on a very steep slope, the trend cannot be trusted. It is an indication that the market is overbought and can be broken immediately.
- The maturity in trend drawings depends on the investor’s own preference according to his trading strategy. However, it can be said that long-term trend drawings are safer.
How to Draw an Up Trendline ?
Uptrend lines are drawn below the price bars, that is, at the lowest levels of the prices. In order to determine an uptrend line, it is necessary to cross the lines at a minimum of 3 points. It would be more useful to explain this issue with an example. Let’s see how to draw an up trendline.
The graph of Ounce gold is given in the figure. In order to analyze gold, trend lines were drawn by using trend formations. Let’s look at how the rising trend line created by the H4 candlestick (4-hours) works.
As can be seen in the chart, the trend formation started at the price level no. 1, saw the numbers 2, 3, 4 and 5 over time, and touched the trend line, but did not go below the line and continued its upward movement. At the 6th point where it touched the trend line, it managed to break the trend and ended the rising trend movement. Now, the old trendline has ceased to act as a support and has become the resistance level of the new trend.
How to Draw a Down Trendline?
The downward trend line is drawn above the price bars, that is, at the highest points of the prices. As in the up trend line, the drawn parts on the down trend line are expected to touch at least 3 points. A good example of a downtrend is shown on the ounce gold chart. With accurate trend plots, the future movement of gold prices can be better detected. Let’s see how to draw an down trendline.
As can be seen in the figure, the first formation of the downward trend line on the H1 (1 hour) chart started with the price step no. The confirmation of the beginning of the trend is obtained by drawing the downward trend, which is combined from the places where it touches at the 2 and 3 points.
On the other hand, it is seen that the descending movement ends by rising above the trend line when it reaches the price level 4. The use of the trend line as a resistance point has now ended, and it has become the support point of new price movements.
How Trendlines Are Used, How Are They Interpreted?
Uptrend: The upward trend line drawn by passing at least 3 points acts as a support level for prices. While the trend is in progress, every point that touches the ascending trendline should be perceived as a support level. Therefore, as long as the price that reaches the support level cannot break down, it can be thought that it will start an upward movement again.
While deciding to trade, BUY can be done from the points that touch the trend line, which we see as support. In case the trend is broken down, the current position is exited and the trade is closed with minimum loss.
Likewise, when a transaction is opened in the direction of the price going down, the upward trend line can show us the last point the price will reach. For this reason, the upward trend line can be determined as the level of taking profit, that is, closing the position, of the current transaction.
Down trend: As with the up trend line, the predicted levels to which the prices can go can be determined on the down trend line. In the charts in the time frame where the trend continues, every point where the prices touch the trend can be considered as a resistance level. For this reason, it can be interpreted that the price coming to the descending trend line will come back and continue to decline as long as it cannot break up.
While making a trading decision, the points that touch this trend can be taken as reference. For example; A SELL transaction is opened at the point that touches the trend line, and gains are made from falling movements. Again, when we want to take the profit of the current long positions, the price levels that touch the trend line, which we define as resistance, can be determined.
What is the Use of Trendlines?
Anyone who wants to make a profit by trading in financial markets should know about topics such as ‘what a trend means, how to draw a trend line’. Thanks to the trend lines, the direction of movement of the prices is accurately predicted. In this way, when making a transaction decision, the transaction is entered from the right points.
The results obtained by drawing the trend line do not only determine the level at which the trade is entered. It also contributes to determining the starting point of the current positions. Therefore, ‘the most accurate positions at the right time’ are obtained with trend drawings.
Another benefit of trend lines is that they prevent emotional trading decisions. Considering that prices move with more analytical movements, emotional decisions do more harm than good to the investor. Therefore, like trend drawings, an emphasis on technical analysis is essential for any successful trader.
Finally, it can be said that a certain experience is needed in order to draw trend drawings in the most accurate way and to see them instantly on the graphs. In order to gain this experience, it is recommended to practice as much as possible on the chart and to monitor the prices within this framework.Share this article