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How to trade trend lines

4 min read

Rising and falling trends are one of the most important topics among technical analysts and traders. Thanks to them, we find that the basic market conditions work in favor of the trader’s position, not against it. Trend lines are easily recognizable lines that traders draw on charts to combine significant levels of resistance or resistance. The resulting line is then used to give the trader a good idea of ​​the direction in which the value of the investment could move. In this article, you will learn how to use this tool and how to draw trend lines.

Basics of the trend line

Understanding the direction of the underlying trend is one of the most basic ways to increase the likelihood of a successful trade.

Falling trend lines indicate that there is an excessive supply. Market participants are more willing to sell an asset than to buy it. As you can see below, when a descending trend line is present, it means that supply exceeds demand.

Vice versa, upward trend is a signal that demand after the asset is greater than the bid and is used to indicate that the price is likely to continue to rise.

How to trade trend lines

Upper trend line. Source: TradingView

Trend lines can vary drastically depending on the time frame used and the slope of the line. It is still true that the longer the trend line, the more significant it is and the harder it is for the price to break it in the future.

Support and resistance

Trend lines are a relatively simple tool that can be used to measure the overall direction of an asset. They can also be used to predict areas of support and resistance. In practice, this means that trend lines are used to identify levels on the chart that will have trouble breaking the price in the future. This information can be very useful for traders looking to enter the market, or it can even be used to effectively manage risk with a stop-loss order.

Technical traders pay special attention to the asset when the price approaches the trend line. These areas often play a major role in determining the short-term direction of the price. When the price approaches the main level of support / resistance, they can occur two different scenarios:

  • The price is bounces off the trend line and will continue in the direction of the previous trend.
  • The price breaks the trend line, which can then be used as evidence that the current trend is reversing or weakening.

Drawing your own trend lines

As already mentioned, trend lines are simple lines that connect local minimus or maximums. The problem arises with finding out which prices are used to create the trend line. They are mostly used on a candlestick chart 4 prices: open, close, high, low. But which ones to use when drawing a trend line?

There is no clear answer to this question. Technical signals generated by various technical indicators are very subjective and trend lines are no exception. It is solely up to the trader to decide the points that will be used to create the line. Regardless of what prices are linked, it is important to note that the more prices touch the trend line, the stronger and more significant the line.

  • In general, ascending trend lines used to link prices that act as support, while the asset has an upward trend. This means that rising trend lines are drawn mainly below cost.
  • Vice versa, descending trend line is generally used to join local highs that act as resistance, while the asset has a declining trend.

You can also use both types of trend lines at the same time. At that moment, a pattern is created.

Example of drawing a trend line

To illustrate the concept of drawing an ascending trend line, we decided to look at the price of BTC / USD. As you can see below, the trend line is drawn to connect the minimums shown.

How to trade trend lines

Bottom trend line. Source: TradingView

As time goes on, we can see in the chart below that the price has again tested the support of the trend line. This is important because the more times the price touches the trend line, the more significant the line. Traders would use the price action to confirm that the trend line is valid. In this case, traders would try to enter a long position as close as possible to the trend line. So they would shop at the local minimum.

How to trade trend lines

Bottom trend line. Source: TradingView

As soon as a technically oriented trader enters a position close to the trend line, he will leave the position open until the price moves below the support of the trend line. Most marketers will constantly adjust theirs stop-loss orders by moving them higher as the trend line continues to rise. This method ensures that the trader can lock as much of the profit as possible without being liquidated too soon. Some exchanges also provide settings trailing stop-loss which means the stop-loss will move automatically with the price.

Conclusion

Trend lines are commonly used by traders who try to ensure that the underlying trend of an asset works in favor of their position. Trend lines can be used effectively by traders to measure potential areas of support / resistance, which can help determine the likelihood that a trend will continue. This strategic advantage is available to any trader who is willing to take the time to learn how to draw a basic trend line and incorporate it into their trading strategy.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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