Trend Lines Explained Simply
The trend lines are one of the simplest but effective tools in the technical analysis. Trend lines help traders to know the direction the market is moving among other potential trading opportunities.
No matter what kind of trader you are, be it Forex, stocks, cryptocurrencies or commodities, trend lines may assist you in viewing both the overall market trend and make more informed decisions.
In this guide, we shall describe what trend lines are, how they operate and how beginners can effectively use it in the trading.
What Is a Trend Line?
A trend line is a straight line, which is drawn on the price chart that finds a connection between two or more significant price points. It assists traders to visualize the market trend.
Trend lines may drift to three directions:
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Upward
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Downward
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Sideways
Through the use of these lines in a chart, the traders can an easily understand whether the market is on a rising path or a downward path or a horizontal one.
The trend lines are an aesthetic measure that assists traders in seeing the direction the price is moving in the market.
Types of Trend Lines
Trend lines are of two major types applied in trading.
Uptrend Line
An uptrend line is highlighted by drawing a series of high lows on the graph.
When the market is on an upward trend, the market is slowly climbing up. Whenever the price is low, it creates a new low which is higher than the other.
The trend line serves the purpose of a support line and in most cases the price tends to come back up.
When there is an uptrend, traders tend to seek buying opportunities when the price reaches the trend line.
Downtrend Line
A series of lower highs are joined with a downwards trend line.
In a down trend, the market is on a downward movement. In every occasion that the price increases, it leaves a high that is lower than the high before.
The trend line in this case is the resistance and the price tends to move downwards once more.
Whenever the trend of the commodity is in a downward direction, traders tend to seek selling points where the price approaches the trend line.
How to Draw a Trend Line
Once you have the simplest rules in mind, it is not difficult to make a trend line.
Step 1: Identify the Trend
The initial thing is to look at the chart and find out whether the market is moving downwards, upwards or flat.
Step 2: Find Key Points
The second step is to draw essential highs or lows on the chart.
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Draw lows during continuation of an uptrend line.
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Highs should be used in drawing a downward trend.
Step 3: Connect the Points
Connect at least two or three points using a straight line.
The stronger the trend line is the more it is touched by the price without being broken.
The Importance of Trend Lines
The trend lines are valuable since they enable the traders to know the market structure.
They can help traders:
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Determine the trend in the market.
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Identify possible entry and exit points.
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Break outs and reversals at the spot.
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Understand market momentum
Trend lines are very popular with the novice and experienced traders due to their simplicity.
Trend Line Breakouts
In other cases the price will be violating a trend line. This is referred to as a trend line break out.
The break out could be an indication that the trend could be slowing down or going the opposite way.
For example:
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When prices lose their uptrend line and begin to fall, then the market can begin to fall.
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When a market breaks the price upward and surpasses a downward trend line, then it can begin to move upwards.
It is common that traders wait to get confirmation before getting into a trade after a breakout.
The Follies to Which Novices Fall
There are several common mistakes that beginners can make when learning how to use the trend lines.
Trend Lines: Candle-Drawn
Trend lines are expected to touch either the key points or the wicks rather than cut across the middle of numerous candles.
Forcing the Line
The movement of the price should fit in a trend line. Traders are not supposed to impose a line where it does not fit.
Ignoring Higher Timeframes
The higher timeframe trend lines are typically more powerful and more trustworthy.
Tips for Using Trend Lines
These tips should help you get in on trend line trading, in case you are new to this game:
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Confirm a trend line using at least two or three touches.
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Trend lines and support and resistance levels.
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Examine longer periods of time to find more powerful trends.
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Draw historical trend lines.
Only with time, you will be able to tell the trends and employ them in your trade strategy.
Final Thoughts
One of the most fundamental and useful techniques in technical analysis is trend lines. They assist traders to know the market direction and look at the trading opportunities.
Learners can become better chart analysts by learning to use trend lines properly and make more comfortable trade decisions.
Trend lines just like any other trading art require practice, patience, and experience. The more charts you research, the less difficult it becomes to see some trends and implement them in your favor.
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