Trendlines - Drawing the Market's Direction
What is a Trend
One of the fundamental premises of technical analysis is that "prices move in trends." A trend refers to the tendency of prices to move in one direction over a period of time. Identifying trends is one of the most important tasks in technical analysis, and trendlines are the most basic and intuitive tool for this purpose.
"The trend is your friend" is one of the most famous sayings in technical analysis. It means that correctly reading the market's trend and trading in alignment with that direction is the key to successful trading.
Three Types of Trends
There are three types of trends in the market.
Uptrend
A state where price continuously makes higher highs and higher lows as it rises.
- Each high is higher than the previous high
- Each low is higher than the previous low
- Buying pressure dominates selling pressure
Downtrend
A state where price continuously makes lower highs and lower lows as it falls.
- Each high is lower than the previous high
- Each low is lower than the previous low
- Selling pressure dominates buying pressure
Sideways (Range)
A state where price moves up and down within a range without clear direction. Price oscillates between support and resistance, with buying and selling pressure in equilibrium.
| Trend Type | High Pattern | Low Pattern | Market Sentiment |
|---|---|---|---|
| Uptrend | Progressively higher | Progressively higher | Optimistic, buyers dominating |
| Downtrend | Progressively lower | Progressively lower | Pessimistic, sellers dominating |
| Sideways | Maintaining similar levels | Maintaining similar levels | Uncertain, equilibrium |
How to Draw Trendlines
A trendline is a straight line that visually represents the direction and slope of a trend on a chart.
Drawing an Uptrend Line
In an uptrend, connect the lows to draw a trendline.
- Find two significant lows—points where price fell and then bounced.
- Connect these two lows with a straight line.
- Check if this line acts as support at subsequent lows.
- When the third low bounces off this line, the trendline is "confirmed."
An uptrend line acts as a dynamic support. When price falls to the trendline, it can be viewed as a buying opportunity.
Drawing a Downtrend Line
In a downtrend, connect the highs to draw a trendline.
- Find two significant highs—points where price rose and then got rejected.
- Connect these two highs with a straight line.
- Check if it acts as resistance at subsequent highs.
- When the third high gets rejected at this line, the trendline is confirmed.
A downtrend line acts as a dynamic resistance. When price bounces to the trendline, it can be viewed as a selling (or shorting) opportunity.
Criteria for Trendline Validity
| Criterion | Description |
|---|---|
| Minimum touches | Draw trendline with two points, confirm with third touch |
| Number of touches | More touches mean higher trendline reliability |
| Duration | Longer-lasting trendlines are more significant |
| Slope | Too steep or too flat trendlines have lower reliability |
| Timeframe | Trendlines on longer timeframes are more powerful |
Channels
A channel is a price range formed by two parallel trendlines. There are ascending channels, descending channels, and horizontal channels.
Ascending Channel
- Lower boundary: Uptrend line connecting lows (support)
- Upper boundary: Parallel line connecting highs (resistance)
- Price oscillates between the two lines while generally rising
Descending Channel
- Upper boundary: Downtrend line connecting highs (resistance)
- Lower boundary: Parallel line connecting lows (support)
- Price oscillates between the two lines while generally falling
How to Use Channels
When a channel is clearly formed, the following trading strategies can be used:
- Buy at channel bottom, sell at channel top: Take advantage of the repetitive movement within the channel.
- Trend acceleration or reversal on channel break: Breaking below an ascending channel signals a bearish reversal; breaking above signals bullish acceleration.
- Target price using channel width: The target price after a channel break is typically the channel width projected from the breakout point.
Trendline Breaks and Trend Reversals
A trendline break is an important signal suggesting weakening or reversal of the existing trend.
Meaning of Trendline Breaks
- Uptrend line break: Price falls below the uptrend line. It signals the end or weakening of the uptrend. Possible transition to sideways or downtrend.
- Downtrend line break: Price rises above the downtrend line. It signals the end or weakening of the downtrend. Possible transition to sideways or uptrend.
Confirming Trend Breaks
Just like support/resistance breakouts, trendline breaks frequently produce fakeouts. Methods to confirm if a break is real:
- Confirm volume: Did volume increase on the break? Breaks without volume are likely fake.
- Confirm candle close: Verify that the candle closes outside the trendline, not just temporarily breaking and returning during the session.
- Confirm retest: If price returns to the trendline after breaking and confirms it as resistance (or support), the break's reliability increases.
- Confirm trend structure change: In an uptrend, if price fails to make a higher low and breaks below the previous low, trend reversal is confirmed.
Stages of Trend Reversal
Trends typically don't reverse suddenly. The general reversal process is:
- Trend weakening: Movement in the trend direction weakens, and counter-trend bounces/pullbacks deepen.
- Trendline break: Price moves outside the trendline, but no clear opposite trend yet.
- Sideways phase: Buying and selling pressure reach equilibrium, exploring direction.
- New trend begins: A new high/low pattern forms in the opposite direction.
Just because an uptrend line is broken doesn't necessarily mean a downtrend begins. It could transition to a sideways phase or reform into a gentler uptrend. Trend reversals should be confirmed in stages.
Combining Trendlines with Support/Resistance
Points where trendlines and horizontal support/resistance intersect carry special significance. They are "confluence" points where two different types of support/resistance overlap.
For example, when an uptrend line and a horizontal support line are both located at the same price level, buy signal reliability increases. Conversely, when a downtrend line and a horizontal resistance line overlap, sell signal reliability increases.
Confluence with moving averages works the same way. When a trendline, horizontal support/resistance, and moving average all cluster at the same price level, that level becomes a very powerful reaction point.
Common Mistakes When Drawing Trendlines
1. Drawing to Fit Your Bias
This happens when you've already taken a long position and want to confirm an uptrend, forcing a trendline that isn't there. Trendlines should match objectively existing highs/lows, not be drawn to fit desired conclusions. This is a classic example of confirmation bias.
2. Trusting a Trendline with Only One Touch
Any straight line can be drawn through two points. For a trendline to be valid, it needs a reaction at the third touch. Trendlines drawn with only two points should be considered "tentative."
3. Confusing Wicks and Bodies
Whether to align trendlines with candle wicks (high/low) or bodies (open/close) varies among analysts. There's no right answer, but it's important to apply a consistent criterion within one chart. Generally, aligning with wicks is a more conservative and accurate approach.
4. Drawing Too Many Trendlines
Drawing too many trendlines on a chart creates confusion. It's more effective to focus on the 2-3 most clear and meaningful trendlines.
5. Ignoring Trendline Slope
Overly steep trendlines (above 45 degrees) are unlikely to sustain. Generally, trendlines with slopes around 30-45 degrees are most stable and sustainable. Steep trendlines often break and reform into gentler trendlines.
Using Trendlines in Cryptocurrency Markets
Cryptocurrency markets experience frequent trendline breaks and reformations due to high volatility. Here are practical tips considering this:
- Use 4-hour or longer timeframes: Trendlines drawn on 1-minute or 15-minute charts frequently break due to noise.
- Analyze alongside Bitcoin: When analyzing altcoin trendlines, always check Bitcoin's trend as well. Bitcoin's trend reversal directly impacts altcoin trends.
- Allow some margin: Considering crypto's high volatility, don't immediately judge a slight move outside the trendline as a break—it's safer to confirm with candle close and volume first.
- Consider logarithmic scale: For long-term charts with large price movements, drawing trendlines on a logarithmic scale rather than linear scale can be more accurate.
In the next article, we'll examine trading volume in detail—a key element for validating the authenticity of trends.
Next article: Trading Volume - The Signal That Moves Before Price