Trading 101: How to Draw and Trade Trend Lines with Logic?

2021/12/16 11:15:45

The introduction of candlestick charts has enabled chartists to analyze the markets with a whole new perspective. The value of technical analysis and mainly price action increased drastically. Though markets move uniquely, the patterns on charts, on the picture, do repeat over and again. As a result, several effective chart patterns and tools emerged.

A trend line is a tool in technical analysis that is extensively used by traders irrespective of the type of analysis they apply to the markets. The use cases being highly reliable and efficient, trend lines are a default tool employed in technical analysis.

What are Trend Lines?

As the name evidently suggests, trend lines are lines drawn across the candlesticks in order to identify the predominant direction of the market. Note that trend lines are only a tool to visualize the market trend and not essentially a chart pattern that provides buy/sell signals. However, when trend lines are plotted correctly, other simple technical factors can be used to predict the market.

Technically speaking, trend lines are lines that help identify potential supply and demand levels, aka Resistance and Support areas in the market. Based on the line drawn, they even help to project the subsequent levels where price could hold and react.

How to Draw Trend Lines?

A trend line is simply a line that is drawn and extended over or below the candlesticks. Yet, a majority of traders fail to plot it correctly. Trend lines are a logical tool and must be drawn with a reason backing them. Drawing trend lines logically and precisely comes with the understanding of a "Trend" and its working. Before jumping right into drawing trend lines on charts, let us quickly glance at the concept of trends.

Trend – The Golden Key to Drawing Trend Lines

A trend is the state of the market, where the price action is a repeated sequence of higher highs and higher lows or lower lows and lower highs. And a Trend is essentially made up of two components – Push and Retracement. Push is the phase where the price heads in the original trend direction, while Retracement is the phase where the market goes against the trend or the direction of the Push.

Most importantly, the market (Retracement) typically holds at the Support/Resistance levels before continuing with the subsequent Push – as shown in the illustration below.

Drawing Trend Lines

To draw trend lines, the first criterion to consider is the existence of a trend. It is not possible to draw trend lines in trending markets that are moving in one direction but not following the above-drawn trend pattern of Pushes and Retracements.

Once the above criterion is satisfied, a trend can be drawn by simply connecting the higher lows or lower highs formed at Support/Resistance levels.

Types of Trend Lines

Based on the direction of the trend, there are two types of trend lines :

· Bullish Trend Line

It is a trend line drawn in an uptrend. As the market is making higher highs and higher lows, the higher lows joined to form a bullish trend line.

· Bearish Trend Line

A bearish trend line is drawn in a downward trending market. The lower highs are connected together to construct the bearish trend line.

Though there exist two types of trend lines – the working, interpretation, and applications remain the same.

How to trade the crypto market using Trend Lines?

As mentioned previously, trend lines are no more than a tool for identifying and confirming the trend of the market. It must be used with other trading techniques to participate in buying and selling.

Trading using Support and Resistance is a basic yet extremely powerful concept to predict the price action.

Support is an area where the buyers tend to push the market higher because of the demand that exists at that price. Similarly, Resistance is the level where the market tends to drop due to low demand and high supply in the market.

By applying the above concept of Support and Resistance, traders anticipate going Long from the Support and Short from the Resistance.

Below is the Bitcoin price chart on the 15 minutes time frame. Here, it is evident that the market is in a downtrend. Drawing a trend line such that the line crosses through the Resistance levels, the existence of an official downtrend is confirmed.

Knowing that the fact BTC is being hammered in the bigger picture, traders can position themselves and go short from the Resistance levels, as shown.

As far as the trade management is concerned, the stop loss can be placed above the Resistance, and the profits can be left running until the market makes a lower low and begins to retrace back up.

Drawing Trend Line on the Bitcoin price chart - Source: BTC/USDT

Closing Words

A trend line is one of the oldest technical tools to exist in the field of technical analysis. Made up of only one line crossing through the candles, many analysts still fail to draw it correctly due to the incorrect understanding of market trends. Trend lines helping traders and investors identify the correct direction of the market makes it another effective tool to use in conjunction with other technical factors and forecast the market. Please follow the KuCoin Blog for more informative trading education. Happy trading!

Did you know that KuCoin offers premium TradingView charts to all of its clients? With this, you can step up your technical analysis and easily plot trendlines on the crypto price charts.

Notice: KuCoin does not provide financial advice. Please do your own risk assessment when deciding how to invest in cryptocurrency and blockchain technology.