How does a trendline work?
The classic way to draw trendline is by drawing a straight line connecting a series of swing highs or swing lows. An up-trend line is drawn through the swing lows and a down-trendline is drawn through the swing highs. In that way the trendline is acting as support to an uptrend or as resistance to a downtrend. Trendline are often referred to as ‘dynamic support & resistance’ meaning that they move with the price trend.
up and down trendines
How to draw a trend line
The way you draw a trendline is by starting on the Lefthand side of the chart and drawing the line towards the right. The rule of thumb is that a trend line must be drawn through at least three ‘swings’ in the price to be valid.
To draw an uptrend line, you start with a swing low on the left-hand side of the chart and connect it to a higher swing low.
To draw a downtrend line, you begin with a swing high on the Lefthand side of the chart and connect it to a lower swing high.
How to use trend lines in trading
How do you trade a trend line? The idea of using a trend line is to determine the direction of the price trend. Traders can then to decide with the trend with the idea that the trend will continue or against the trend because they think the trend will reverse. With both strategies, the interpretation of the trendline is the same
While the price is above the uptrend line the trend is up, which is bullish.
While the price is below a downtrend line, the trend is down, which is bearish.
Trend following
Trend following is a trading strategy that buys when the price is rising and sells short when the price is falling. One popular trading method to determine whether the overall price trend is higher is by using an uptrend line. Likewise, a downtrend can be determined by using a downtrend line.
Countertrend trading
Countertrend trading is a strategy that sells when the price is rising and buys when the price is falling. This closer to the basic principle of investing to ‘buy low and sell high’. For short term traders, the reason to countertrend trade is with the idea of a reversion to the mean, meaning that after trending in one direction, the price will eventually return to is average price.
SPECIAL TIPS for using Trendlines
1 Is there a trend?
The ultimate newbie mistake with trendlines that you want to avoid is using a trendline when there is no trend. The clue is in the name!
Looking at this chart below - the market is just going sideways. It is therefore no surprise that all these trendlines don’t work.
The classic way to draw trendline is by drawing a straight line connecting a series of swing highs or swing lows. An up-trend line is drawn through the swing lows and a down-trendline is drawn through the swing highs. In that way the trendline is acting as support to an uptrend or as resistance to a downtrend. Trendline are often referred to as ‘dynamic support & resistance’ meaning that they move with the price trend.
up and down trendines
How to draw a trend line
The way you draw a trendline is by starting on the Lefthand side of the chart and drawing the line towards the right. The rule of thumb is that a trend line must be drawn through at least three ‘swings’ in the price to be valid.
To draw an uptrend line, you start with a swing low on the left-hand side of the chart and connect it to a higher swing low.
To draw a downtrend line, you begin with a swing high on the Lefthand side of the chart and connect it to a lower swing high.
How to use trend lines in trading
How do you trade a trend line? The idea of using a trend line is to determine the direction of the price trend. Traders can then to decide with the trend with the idea that the trend will continue or against the trend because they think the trend will reverse. With both strategies, the interpretation of the trendline is the same
While the price is above the uptrend line the trend is up, which is bullish.
While the price is below a downtrend line, the trend is down, which is bearish.
Trend following
Trend following is a trading strategy that buys when the price is rising and sells short when the price is falling. One popular trading method to determine whether the overall price trend is higher is by using an uptrend line. Likewise, a downtrend can be determined by using a downtrend line.
Countertrend trading
Countertrend trading is a strategy that sells when the price is rising and buys when the price is falling. This closer to the basic principle of investing to ‘buy low and sell high’. For short term traders, the reason to countertrend trade is with the idea of a reversion to the mean, meaning that after trending in one direction, the price will eventually return to is average price.
SPECIAL TIPS for using Trendlines
1 Is there a trend?
The ultimate newbie mistake with trendlines that you want to avoid is using a trendline when there is no trend. The clue is in the name!
Looking at this chart below - the market is just going sideways. It is therefore no surprise that all these trendlines don’t work.