Trendlines stand at the frontline of every trader’s journey. It is the first tool used for technical analysis, not only because it is the simplest one but also because its results are immensely accurate in predicting future price movements.
A trendline is simply a line drawn over a chart that connects a series of candles. The end result proposes price levels, or directions, that an asset should respect in order to move in the favored direction.
For example, a trendline drawn in the example below represents a diagonal level of support. If the line was respected more than two times during any time frame, we could expect it to continue its behavior. If at any point the trendline ‘breaks’ and prices fall below it, the trendline turns into a resistance level.
On lower timeframes, trendlines are respected for shorter periods of time. A trendline drawn over a 5-min timeframe will (optimistically) do its job up to the next 30 or 60 minutes.
On higher timeframes (hours, days, and weeks), the opposite is true. Trendlines will not only be respected for longer periods of time but will also hold more weight. Traders tend to respect HTF trendlines far more than LTF ones. A 4H trendline is far stronger and has less of a risk to fail compared to a trendline formed on 15m timeframes.
Trendlines are easy to create. On any charting platform, simply connect two points on any given timeframe. We suggest looking for price levels where prices continually bounce or face rejections. Alternatively, draw multiple trendlines if they look as if they form a geometrical pattern.
Do keep in mind that trendlines reveal trends and that any trend can be short-lived. Moreover, understand that a trend is a suggestion for which direction the price is headed towards and that they do not serve as a bias confirmation.
Traders should draw trends starting from the body of a candlestick. It is rare to draw lines beginning from a wick, and it should only be done if the wick has a corresponding volume that covers it. In some events, trendlines remain intact even if the line does not fully touch a candlestick within any direction.
Again, trendlines can be drawn to identify support or resistance levels. A combination of both can help traders identify a specific pattern, like a rising wedge, but most of the time, users encounter a channel - another significant pattern that we will cover in the next lesson.
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