What is the Trend line?
The Trend line is probably the most common form of technical analysis in Stock Trading. It is one of the most versatile tools in trading.
Trend lines are one of our favorite trading tools because they allow us to explore markets and trends in many different ways. The trend line is applicable across all timeframe. If drawn Trend line correctly, they can be as accurate as any other trading method.
In this article, we will discuss
- Type of Trend line
- How to Draw Trend line correctly
- How to Trade using Trend line
- The Trend Line Breakout technique.
Types of Trend line
Uptrend Trend Line: Uptrend line is drawn along the bottom of easily identifiable support areas. The area on the chart that shows buying pressure along with uptrend. This is known as ascending trendline
Downtrend Trend Line: Downtrend trendline is drawn along the top of easily identifiable resistance areas. The area on the chart that shows downward selling pressure. This is known as a descending trendline.
How to Draw a Trend Line correctly?
To draw trendlines correctly, all you have to do is locate two major tops or bottoms and connect them with a line.
Steps To draw trendline correctly
- Focus only on the major swing points.
- Connect at least 2 major swing points.
- Adjust it so that you get the most number of touches.
How to Trade using Trend Line?
We learn how to draw Trend lines correctly
If you want to find good trading setup, then you must trade near the Trendline.
This allows you to have a small stop loss on your trades which is extremely good for your risk to reward ration
But that’s not all…
You have combine Trendline with Support and Resistance, that’s where you find the best trading setup and you can use reversal candlestick patterns (like the Hammer, Bullish Engulfing, etc.) as your entry.
The Trend Line Breakout technique.
Here’s how it works… Wait for a pullback in an uptrend
Draw a Trend Line connecting the highs of the pullback
If the price breaks the Trend Line, then enter the trade
When you draw a Trend Line: 1) Focus on the major swing points 2) Connect the major swing points 3) Adjust the Trend Line and get as many touches as possible. The Trend Line Breakout technique helps you time your entry in a trending market.
You can use a Trend Line to trail your stop loss and ride massive trends
If a Trend Line breaks, wait for the re-test and see if it holds. If it does, the market is likely to reverse in the opposite direction.