Trendlines have gained a lot of popularity as a tool for locating potential points of support or resistance in trend-following markets.
In forex and stock trading, trendlines help us determine key supply and demand zones. You may encounter excessive activities from buyers or sellers once the price hits trendline support or resistance.
So, technical traders, especially trend-followers, must learn to draw trendlines to place buy/sell orders at correct price pullback levels.
Furthermore, trendlines help you determine trend reversal conditions. For instance, the price breaks trendline support after making a bullish run indicates a bearish trend reversal.
This guide will explain how to draw trendlines on price charts. Also, we’ve included trendline buy-sell strategies with chart examples.
What are Trendlines, and How do you Draw Them?
As the name suggests, trendlines are levels that can be drawn within a trend direction. Technically it works as a hidden support or resistance, which is only visible once you can draw a trendline correctly.
To draw a trendline, you need to draw a straight line connecting the price swing highs or lows in a trend-following market. For instance, if you join the higher lows during a bullish market, you’ve just drawn trendline support!
The above GBPUSD daily chart shows an example of trendline resistance drawn during a bearish market trend. Each time the price pulled back to the trendline, sellers rejected it, resulting in a further bearish move.
Trend-based traders wait for the price to retest support/resistance zones. Horizontal S/R levels indeed help you identify key price reversal zones. But it doesn’t outline the higher lows or lower highs like a trendline does.
One common mistake for beginners is they often force the trendline to match a trend-following price move. The fact is, you should never try to connect the market highs and lows by force. If you do, you might outline the wrong support/resistance levels and guide you through early or late entries.
Trendline Trading Strategy
- Connect the higher lows of the price using a straight line during a bullish market.
- Wait for the price to pull back near the trendline support.
- Enter long if the price refuses to break below the support and rebounds for an upside move.
- Place SL below the trendline.
- Relate the lower highs of the price with a straight line in a bearish market trend.
- Wait for the price to retrace near the trendline resistance.
- Enter short whenever the price fails to exceed the resistance and turns for a further bearish move.
- Place SL above the trendline.
Trendline Trading Pros & Cons
- Helps determine correct market bias.
- Outlines strong support/resistance zones.
- Perfect for assessing trend-following trading opportunities.
- Detects trend-reversals.
- Easy to draw and simple to use.
- Sometimes, the price may plot false breaks around trendlines leading you to adverse trading decisions.
It’s critical to distinguish between a price trend and the present direction of market movement. An upward trend does not guarantee that the price will always rise. In reality, markets rarely go in only one direction, except for a few extremely rare events that continue for a brief period. In an uptrend, the price rises consistently upward over a period of time, as shown on the price chart. The price may drop again for a few hours or days before rising again.
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