When conducting technical analysis, trend lines are a common technical tool used to delineate the direction of price movement and potential support and resistance levels. In an uptrend, prices make higher highs and lows; in a downtrend, prices make lower highs and lows.
When the trend line moves out, the simplest way to use it is to trade at the trend line. For example, in a downward trend, the cost-effectiveness of high shorts must be greater than that of low longs. Since it is always suppressed by the downward trend line, the cost-effectiveness of shorts at the downward trend line is the highest, and a breakthrough is a stop loss. On the contrary, in an upward trend, the price is constantly supported by the upward trend line, so the cost-effectiveness of longs at the trend line is the highest, and a stop loss is made if it falls below.
1. Uptrend line:
Determining the direction of the trend: First, confirm that the price trend is upward.
Select lows: Find consecutive relative lows on the chart and select the most obvious ones.
Connect low points: Use straight lines to connect these low points. This line is the uptrend line.
Support: An uptrend line is considered a support line because buying opportunities often arise when prices approach or touch the trend line.
Trend continuation: A long-standing rising trendline may continue to guide prices upward.
In Figure 1.1, it is obvious that the yellow line has gone out of the structure of rising highs and lows. It was not until the subsequent upward trend line fell below that a trend reversal signal appeared and the upward trend ended.
In other words, every new high is initiated by support at the yellow line, so this trend line is solid and valid.
2. Downtrend line:
Determine trend direction: Confirm that the price action is downtrend.
Select high points: Find consecutive relative high points on the chart and select the most obvious ones.
Connect High Points: Use straight lines to connect these high points. This line is the downtrend line.
Resistance effect: A downtrend line is considered a resistance line because selling opportunities often arise when prices approach or touch the trend line.
Trend continuation: A long-standing downward trendline may continue to guide prices downward.
Figure 2.1 - Downtrend
In Figure 2.1, the price is constantly suppressed by the yellow line, emerging from a structure of continuously lowering highs and lowering lows. And this trend line is the starting point of each new low.
3. Application and precautions:
Trend confirmation: Trend lines help confirm the trend direction of prices and provide buying and selling opportunities.
Support and resistance: Trend lines provide an important reference for support and resistance, and investors can formulate trading strategies accordingly.
Multiple confirmation: It is best to combine other technical analysis methods to confirm the validity of the trend line to reduce the risk of wrong judgment. For example, support and pressure exchange levels, structural adjustments, volume-price relationships, etc.
Adjust trend lines: As price trends change, trend lines may need to be adjusted in time to accommodate the new price movements.
Calmly deal with the true and false destruction of trend lines: trend lines will not be effective for a long time, they are time-sensitive. After the trend is initiated and the trend line is broken, we need to strictly stop the loss. But if the subsequent price regains the trend line, we can continue to trade within the trend line.
Author: Manson24