Anyone who uses technical analysis must understand What a trend is, how to determine a bullish or bearish trend line and how to draw a trendline correctly. By mastering these things, you can effectively invest in Fixed Time Trade or Forex to bring in a stable income for you from Olymp Trade.
In this article, I will explain to you what a trendline is and help you discover how to use and draw the trend line to increase your winning rate significantly.
What is a trend line?
A trend line (trendline) is a line connecting peaks or troughs to represent the current direction of the price. It is used as a tool to identify market trends and help traders make accurate trading decisions.
An uptrend is confirmed by new highs higher than old ones and new lows higher than old ones. The line connecting the troughs is called the bullish trendline.
A downtrend is confirmed by new highs lower than old ones and new lows lower than old ones. The line connecting the peaks is called the bearish trendline.
A sideways trend occurs when the peaks and troughs are equal, confined to a narrow channel.
Meaning of the Trend line
Understanding the direction of the trend line is one of the most basic ways to increase the probability of a successful trade. As it ensures the fundamental market factors are working in your favor.
The trend lines are sloping down indicating that there is an oversupply of the trading asset. Market participants are more willing to sell than buy. So you should limit your long positions. As the market is unlikely to get higher gains when the long-term trend is down. Conversely, a bullish trend line is a signal that demand is greater than supply and the price is more likely to go up.
The trendline is one of the most important tools of technical analysis. Instead of looking at the past performance or other fundamental factors, the technical analyst can study the current price action trends.
After determining the trend of the market, traders can easily set up nice entry points to take profits.
How to draw a trend line correctly
Some investors, when drawing a trendline, only use the body of the candle to draw. However, many people use the entire wick of the candle. In general, in case the wick is too long, you can ignore it. You can refer to the following two charts.
When you draw the trend line through the candlesticks’ wicks.
When you draw a trendline going through the bodies of the candlesticks.
Rules when drawing trend lines
To be consistent in drawing trendlines, we need to remember the following 2 rules.
Rule 1: When drawing a trendline, you must have a minimum of two points. However, to confirm a trend, you need to add a third point, which is on the same line as the previous two.
As you can see, the uptrend started forming with the first and second bottoms. The third bottom is the trend confirmation signal.
Rule 2: Never think of a trendline as just a straight one. To be more precise, it is a zone or a level. Usually, the lower wick can be outside the range of the trendline. However, a trendline is a zone rather than a single line. So if the price breaks the trendline with the lower wicks being penetrated, it does not mean the trend is broken.
When the trend lines are stronger, the price will try to bounce up or down this zone to retest. Therefore, when this zone cannot be broken, a Hammer candlestick can be formed here easily.
Notes on using trendlines
Trendlines are never horizontal. They should always be diagonal.
There are only two types of trend lines, bearish line, and bullish lines. When the market is sideways (horizontal line), it is not considered a trend line.
A bearish trend line shows that the market is in a downtrend. If it is broken, the market will change direction likely, moving from bearish to bullish.
A bullish trendline shows that the market is in an uptrend. If it is broken, it means that the market will change direction, moving from bullish to bearish.
It takes at least 2 peaks or 2 troughs to draw a trend line. But a third one is required for that trendline to be confirmed.
The steeper the trend line, the lower the confidence and the higher chance it can be broken.
The more times the price touches the trendline, the more valuable it is. Because many traders will use them as support or resistance levels.
Never try to draw a trendline that “fits” the market. If the trend line doesn’t match the market, it’s wrong.
The basic uses of the Trend line in trading
Traders are often very interested in bearish trendlines and bullish trendlines because they describe the underlying market conditions that are working in favor of the trader’s position. Here are 2 basic uses of trend line that traders love.
Use trendlines as support and resistance levels
A trend line is a relatively simple tool used to gauge the overall direction of a given asset. But more importantly, it can also be used by traders to help predict support and resistance levels.
This information can be very useful for traders looking for strategic entry points or used for effective risk management, by identifying where to place stop-loss orders.
Technical traders pay particular attention to the zones near the trend line because these ones often play a key role in determining the short-term direction of the price.
The Price channel is made up of a trend line and a line parallel to it drawn from a top (in the case of an uptrend) or a bottom (in the case of a downtrend).
There are two types of price channels including Bullish Channel and Bearish Channel. The price will move inside these 2 channels. When the price touches the lower channel line, it will be the support level. Conversely, the upper channel line will be the resistance level.
A breakout of a price channel can signal a trend reversal or a more intense bullish or bearish continuation. Traders need to observe more candlestick cycles of the price to determine accurately.
Trend lines are used a lot in transactions in Olymp Trade. Because traders seek to ensure that the trend is moving in their favor. Trend lines are also effectively used to assess potential support/resistance levels, helping to determine the likelihood of a trend continuation.
This strategy can be used by anyone willing to take the time to learn how to draw a basic trend line and incorporate it into their trading strategy. Good luck and happy trading.
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