The use of trendlines is the most basic and most effective tool to have in your trading.
There is a saying in the financial world: "The trend is your friend." You shouldn't trade against the major trend. A trend is the direction in which the price is heading. Prices never move in straight lines but move in waves: advances, retraces or consolidates.
A trendline is a straight line with either a positive or negative slope, drawn to the right with at least two connection points. The connection points of a trendline should be the highs and lows of a price bar. If you only use the closing prices, you will not take into considerationn all the price action that has happened during that time period.
Drawing trendlines is more of an art than a science, because of its subjective nature, not two traders draw trendlines the same way. But remember this: the more obvious the trendline is, the more chances it might be valid, as more traders will react to it.
Trendlines provide 4 useful informations to the trader:
Show the direction of the market: uptrend, downtrend or sideways trend
Display the support and resistance levels
Provide entry and exit points
Display chart patterns
Key points on trendlines
The more connection points the trendline has, the more valid it becomes.
The longer trendline has more weight than a shorter one.
Trendlines are dynamic levels that change overtime, opposed to horizontal support/resistance levels that are static overtime.
The longer time frames have more weight than the shorter ones.
The trendline has more weight if it has been used both as a support and resistance then if it was only a support or just a resistance.
The points connecting the trendline should preferably be evenly spaced, not too close together.
The angle of a trendline is also important, if the slope is too steep, prices will not sustain for very long. The optimum angle to look for is an angle of 45º.
Support becomes Resistance and Resistance becomes Support.
Horizontal support/resistance levels
The most basic form of support and resistance is the horizontal S/R levels. Horizontal support/resistance levels are static in time, where trendlines are dynamic levels that change overtime.
Reactions at those levels are not always perfect, we refer more to zones of S/R rather than precise levels.
Time plays an important role in determining the strenght of a level. S/R levels hold a greater significance on longer timeframes 1 hour or greater.
Key points on S/R levels
A line that has been both support and resistance is proved to be stronger and more stable overtime
Look for heavy volume at a level to increase its significance
More price activity at a level increases its significance as it shows the interest of traders
It takes 2 points to create a line, 3 points make it more valid
Most recent trading activity at a price level holds more importance
Price often tends to resist at round numbers, they act as psychological barriers
Support is found where price bounced significantly at a level: look for long lower shadows
Resistance is found where price retraced significantly at a level: look for candles with long upper shadows
There is a saying in the financial world: "The trend is your friend." You shouldn't trade against the major trend. A trend is the direction in which the price is heading. Prices never move in straight lines but move in waves: advances, retraces or consolidates.
A trendline is a straight line with either a positive or negative slope, drawn to the right with at least two connection points. The connection points of a trendline should be the highs and lows of a price bar. If you only use the closing prices, you will not take into considerationn all the price action that has happened during that time period.
Drawing trendlines is more of an art than a science, because of its subjective nature, not two traders draw trendlines the same way. But remember this: the more obvious the trendline is, the more chances it might be valid, as more traders will react to it.
Trendlines provide 4 useful informations to the trader:
Show the direction of the market: uptrend, downtrend or sideways trend
Display the support and resistance levels
Provide entry and exit points
Display chart patterns
Key points on trendlines
The more connection points the trendline has, the more valid it becomes.
The longer trendline has more weight than a shorter one.
Trendlines are dynamic levels that change overtime, opposed to horizontal support/resistance levels that are static overtime.
The longer time frames have more weight than the shorter ones.
The trendline has more weight if it has been used both as a support and resistance then if it was only a support or just a resistance.
The points connecting the trendline should preferably be evenly spaced, not too close together.
The angle of a trendline is also important, if the slope is too steep, prices will not sustain for very long. The optimum angle to look for is an angle of 45º.
Support becomes Resistance and Resistance becomes Support.
Horizontal support/resistance levels
The most basic form of support and resistance is the horizontal S/R levels. Horizontal support/resistance levels are static in time, where trendlines are dynamic levels that change overtime.
Reactions at those levels are not always perfect, we refer more to zones of S/R rather than precise levels.
Time plays an important role in determining the strenght of a level. S/R levels hold a greater significance on longer timeframes 1 hour or greater.
Key points on S/R levels
A line that has been both support and resistance is proved to be stronger and more stable overtime
Look for heavy volume at a level to increase its significance
More price activity at a level increases its significance as it shows the interest of traders
It takes 2 points to create a line, 3 points make it more valid
Most recent trading activity at a price level holds more importance
Price often tends to resist at round numbers, they act as psychological barriers
Support is found where price bounced significantly at a level: look for long lower shadows
Resistance is found where price retraced significantly at a level: look for candles with long upper shadows
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