How drawing trend lines help traders of all experience levels, part 1 2016.07.17
Dear Traders,
Many of you wonder whether it's worth the effort and time to learn how to draw trend lines on charts.
Starting traders often believe that using trend lines is exclusively a practice for traders with years or even decades of experience.
Some beginners even hesitate to use automatic solutions - like True Trendline indicator for MetaTrader 4.
But here's the good news.
Traders of all experience levels can benefit from trend lines - even traders who only recently started trading.
Furthermore, most seasoned traders agree that drawing trend lines helps boost their trading level.
So, here is our agenda for this article:
...I will not only explain why trend lines are so powerful…
...but also share the details on how to draw trend lines to achieve the maximum benefit.
Trend lines are not the only trending tools
Let's be clear - drawing trend lines is an old-school technique.
Then how will your trading benefit from trend lines?
At the very least, drawing trend lines can give you the following five advantages:
- identification of a trend - the ability to connect tops and/or bottoms and see bigger moves
- making chart patterns - a simple method to mark consolidations and market pauses
- spotting divergence - a practice to measure momentum between various highs and lows
- marking breakouts - a rough price zone to see whether price can break support or resistance
- recognising bounces - a rough price zone to see a failure to break.
There is one drawback, however.
You have to manually draw trend lines - it takes time and can lead to errors.
Fortunately, the pros far outweigh the cons.
The art and science of trend line drawing
Drawing trend lines is a paradox - it is both art and science at the same time.
Want to know why?
Guidelines can be applied to trend line drawing (the science part)...
...but each trader will interpret price movements in their own way and draw trend lines with noticeable differences (the art part).
Ultimately, a trend line is an intuitive tool - as long as you keep in mind the following:
- connecting two support or resistance spots offers a potential trend line
- connecting at least three support or resistance spots displays real support or resistance
There are other important guidelines to keep in mind if you want to draw technically good lines.
How to draw useful trend lines
Though no two trend lines are exactly the same, good trend lines do share common characteristics.
Let's review the most important of them.
Shallow trend lines
Shallow-angled trend lines mark the boundaries of a corrective chart pattern.
Chart patterns are an integral part of comprehensive chart analysis.
They help traders understand the market psychology of the moment:
...a rising or falling wedge shows that the trend is in trouble and could end soon…
...a bear flag or bull flag is often a confirmation that trend will continue…
...and a head and shoulders pattern often indicates the end of a trend.
Break of the support and resistance levels offers important information:
...either the pattern is confirmed and the trend continues…
...or the pattern fails and the trend stops.
Here are some of the patterns to keep in mind:
- rising wedge - break of support confirms reversal and break of resistance invalidates reversal
- falling wedge - break of resistance confirms reversal and break of support invalidates reversal
- bear flag - break of support confirms trend continuation and break of resistance invalidates continuation
- bull flag - break of resistance confirms trend continuation and break of support invalidates continuation
- head and shoulders - break of support confirms reversal
- inverted head and shoulders - break of resistance confirms reversal
The list doesn't quite stop here - there are a lot more patterns available.
A contracting triangle shows indecision and often breaks in the same direction as the previous impulse.
A double or triple bottom confirms that trend failed to continue.
I'll stop here, but if you want to know more - watch our video below for an overview of chart patterns.
Part 2 coming soon
This concludes part 1 of our series on trend lines.
What's next?
Brace yourselves - we will discuss steep trend lines, trend channels, number of hits as well as underthrows and overthrows.
Keep an eye on our blog or follow our twitter account and be the first to read the next post.
See you all in part 2.
Cheers and good trading,
Chris
