How drawing trend lines helps traders of all experience levels, part 2
Dear Traders,
After reading part 1 of my series on trend lines, you probably agree that drawing trend lines is an important component of a well-balanced trading style.
Furthermore, I also revealed why this technique is suitable for traders of
all experience levels.
However, reading and implementing the second part's lessons, is an essential learning step too.
Continue reading if you want to know more about:
- drawing correct trend channels
- assessing which trend lines are valuable
- which part of the chart is relevant.
The value of steep trend lines
Trend lines with a steep angle, typically occur when price is moving with momentum i.e:
...when the majority of candles are moving in one direction, with small counter-trend pullbacks.
Steep trend lines are useful as a trail stop-loss (exit), or as a setup to enter the break of a counter-momentum setup (entry).
The meaning behind the trend line angles
Wondering what qualifies as a steep or shallow trend line?
Well, basically:
- steep trend lines typically have an angle of 45 degrees or more
- shallow trend lines vary from 0 degrees to roughly 25 degrees.
Anything between 25 and 45 degrees can be considered medium-angled, which is excellent for trend channels (we'll get back to that later).
It's crucial to note that I only make a rough estimate of the trend line angle, not the exact measurements.
Take your own angle
Did you know that traders can change the angle of a trend line?
That's one of the fascinating features of the chart.
Traders can manipulate the angle, by increasing and decreasing the number of bars or candles that are visible on the chart.
The chart with the best balance displays approximately 150 to 200 candles.
Trend channel's nuts and bolts
Until now, we've discussed single trend lines representing support or resistance.
Trend channels consist of two trend lines, which are parallel to each other.
Trend channels signify trend formation, with an angle of 25 to 45 degrees.
Such an angle provides an ideal balance of momentum and correction.
Channels with lower or higher angles:
...can still provide useful support and resistance info...
...but they do not qualify as trend channels.
We simply call them channels.
Keep your distance between hits
In part 1, I mentioned that:
- two hits qualify as a potential trend line, but
- the third point is required to confirm a trend line.
There are additional guidelines for counting the correct number of hits on a trend line.
These guidelines state that you should not count multiple candles, that touch the trend line at the same spot.
Instead, these hits should only count as one point on the trend line.
There has to be a gap of several candles between the hits, before you can count them as two separate hits.
These guidelines are very important:
...not following them might mean you see multiple trend lines, instead of just one.
Where to draw the line
Another critical guideline is how traders draw trend lines, in relation to the candles and wicks.
The best trend lines use candle' highs and lows:
...but they do not cut through any part of the candle.
However, the charts are sometimes not that perfect.
A trend line can still look fine, even if the trend line cuts through a wick or part of the candle.
After all:
- trend lines and trend channels are mere indications of price actions, showing
- extremes that go past a trend line, so
- it's OK to draw a trend line that cuts through a candle or wick.
But there is a boundary.
I avoid drawing trend lines where entire candles are placed on the opposite side.
This is called a break or breakout.
Last but not least, I think it's perfectly fine to draw multiple trend lines on the chart.
The market itself is not perfect, so drawing multiple trend lines only adds value to the analysis.
It doesn't hurt to:
- see different angles and support/resistance
- connect different tops, bottoms, wick or candles.
In fact, your trading will probably benefit from it.
However, make sure that the number of trend lines is not too confusing.
Using trend lines to decide trades
Now that you've read part 2 of our series on trend lines, you can hopefully draw valuable trend lines yourself.
Now it's time to start using these trend lines, to make profitable trading decisions.
The following video describes how to effectively utilise decision spots, breaks, breakouts and bounces to trade.
And as always, if you have any questions or feedback - feel free to use our comments section.
Cheers and safe trading,
Chris
