Trendlines are the main part of technical analysis and trading on charts. The correct usage of trendlines will bring you a significant profit. Conversely, using them improperly, they will be ineffective.
Improper usage of the trendline in trading will guide you to a wrong belief of price reversal like a trend has strength when the truth it does not.
To help you use trendlines effectively, here are some basic tips to use trendlines for trading.
The Basics
Trendlines’ main function is to highlight the trend. They connect swing low to swing high starting from the lowest point on the downward movement to the highest pint of the upward movement. The trend line will rise whenever the price rises.
You will know that the price trend upwards if the trendline connects the lows into ascending points.
Besides, you can also draw a trendline along with the individual swing highs. That way you will know the strength of each price move as well as the strength of the trend.
If the swing high falls, then the price also falls. If you connect the highs during this period, then, you will get a descending trendline that reflects the downward trend.
Multiple Trendlines
Normally, you will encounter more than a single trendline. You can draw multiple trendlines that show the price movement of various periods of time.
Price cannot go on the vertical rise or fall for a long time, thus, trendlines normally have a short life. Consequently, draw trendlines every time you have the chance to spot the overall trend.
The opportunities for you to buy or go long usually occur when a short-term downtrend crosses the overall ascending trend. On the other hand, you get the selling or shorting opportunities when a short-term uptrend crosses the overall descending trend.
Adjusting Trendlines
After you draw trendlines, you have to adjust them since prices do not move in the same fashion and trendline moves along time and price.
Thus, you need to adjust them for any acceleration or deceleration of the trend. You have to consider the price movement whenever you want to adjust the trendline.
For instance, the trend does not mean end when the price moves below the trendline during an uptrend. Sometimes, the line just needs to be adjusted.