TECHNICAL ANALYSIS

What Are Trendlines?

In this 'Trendline' series, we are going to show our key "Trendlines" strategy that no one talks about. This module is basically designed for an absolute beginner to an experienced market specialist.

Moreover, we'll discuss all about trendlines that you should know as a trader or investor, teach you how to draw trendlines correctly using lots of chart examples.

We recommend you not to skip this whether you have prior knowledge of "Trendlines" or not. There's a lot to learn and lots to practice. So let us start with a simple question - "What is a line?"

A line is a set of points that are simply connected. Within the scope of technical analysis, these points are typically price highs or price lows.

What is a Trendline?

A trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support and resistance.

In simple words, a trendline is a line that we draw on our chart by connecting the swing highs and swing lows during a 'Trending Market'.

Downtrend:

The bottom of each 'Run' before the pullback begins, called as Swing Low (S-L) and the top of each 'Pullback' before a 'Run' begins, called as Swing High (S-H).

In downtrend, these Swing Highs and Swing Lows are reffered to as Lower Highs and Lower Lows respectively.

Uptrend:

At the top of each 'Run' before the pullback begins, called as Swing High (S-H) and the bottom of each 'Pullback' before a 'Run' begins, called as Swing Low (S-L).

In uptrend, these Swing Highs and Swing Lows are reffered to as Higher Highs and Higher Lows respectively.

Now, remember one point that price won't always move smoothly in trending market. As you can see in the above two examples few candles won't touches the trendline or exceeded the trendline that means don't look for a ideal trendline setup.

Need of trendlines

Trendlines are important for both trend identification and confirmation
Trendline represent the psychology between the bulls and the bears
A gap-up or gap-down through a trendline offers the best trade setup
Reaction on price will often occur at or near a trendline
A trendline can determine whether the market is optimistic or pessimistic

Upward trendline indicates that the bulls are in control (extremely optimistic)

Downward trendline indicates that the bears are in control (extremely pessimistic)

Uptrend vs Downtrend

Trendline	Purpose of trendline
Upward line	Indicates bulls are in control
Downward line	Indicates bears are in control
Horizontal line	To identify support and resistance
Vertical line	To identify moments in time
Diagonal line	To identify both price and time

How to draw Trendlines?

1. In a downtrend, trend lines should be drawn above the price. And this downward trendline always act as resistance.
2. In an uptrend, trend lines should be drawn below the price. And this upward trendline always act as support.

Uptrend line vs Downtrend line

A trend line is determined by the highs in a downtrend and the lows in an uptrend.

To draw a trend line either uptrend or downtrend, at least two swing highs or swing lows are required [Rule No.1].

Some traders use the bodies of the candlesticks to draw trend lines, while others prefer the wicks. While most people will use the wicks to draw trend lines, the bodies can also be used to draw trend lines on a chart.

Trading with trendlines

There are two main approaches to trading with trendlines:

When the price finds support or resistance at the trend line, it is time to enter.
When the price breaks through the trend line, you can enter.

In the next section, we'll discuss these two approaches of using trend lines to trade.

Don't enter trades blindly because price has touched a trendline, you should always wait for price action

Types of trendlines

In modern technical analysis, trendlines are one of the most often utilized and misrepresented (not used correctly) techniques. There are many types of trendlines available in the financial market like an uptrend, downtrend, counter-trendline, diagonal, inner/outer trendline, and many more. But majorly there are three types of trendlines and all the others come under these.

The Standard Trendline
The Parallel trendline
The Supplement Trendline

1) The Standard Trendline

Standard trendline consist of uptrend lines or downtrend lines or both.
Standard uptrend lines act as an support where buyers stepped in and bid the market higher.
Standard downtrend lines act as an resistance where sellers stepped in and counter the bounce in the price.
The correct way to draw a standard uptrend line is to connect higher lows price points.
The correct way to draw a standard downtrend line is to connect lower high price points.

Standard Trendline Example- Types of Trendlines — The Standard Trendline

2) The Parallel Trendline

The parallel trendline is used to identify a channel between the highs and the lows.
If drawn correctly, you can notice the prices are confined between those two parallel lines.
The bigger the channel, the more significant it is.
The upper limit of the dominant area act as resistance.
The lower limit of the dominant area act as support.
The parallel trendlines can be drawn during an uptrend, downtrend or sideways market.

Parallel Trendline Example- Types of Trendlines — The Parallel Trendline

3) The Supplementary Trendline

The supplementary trendlines are used to draw trendlines during the short period of time.
Supplementary trendlines are used to enhance the analysis for shorter timeframe ( generally used with other type of technical analysis).
If you are beginner, better to avoid the trade based on supplementary trendlines.
The correct way to draw a supplementary trendline is to connect the day's low of at least two previous days to the yesterday's high point.