Trend Lines
A bull trend line is a line drawn across the lows of a bull trend, and a bear trend line is drawn across the highs of a bear trend. A trend line is most helpful when looking for entries in the direction of the trend on pullbacks and in the opposite direction after the trend line is broken. Trend lines can be drawn using swing points or best fit techniques such as linear regression calculations or simply quickly drawing a best approximation. They also can be created as a parallel of a trend channel line and then dragged to the trend line side of the bars, but this approach is rarely needed since there is usually an acceptable trend line that can be drawn using the swing points. Sometimes the best fit trend line is drawn just using the candle bodies and ignoring the tails; this is common in wedge patterns, which often do not have a wedge shape. It is not necessary to actually draw the line when it is obvious. If you do draw a line, you usually can erase it moments after you verify that the market has tested it, because too many lines on the chart can be a distraction.
Once a trend has been established by a series of trending highs and lows, the most profitable trades are in the direction of the trend line until the trend line is broken. Every time the market pulls back to the area around the trend line, even if it undershoots or overshoots the trend line, look for a reversal off of the trend line and then enter in the direction of the trend.
How to Draw and use Trendlines
Generally speaking, it is advisable to wait for three confirmed points of contact before you start putting further attention to a trendline. Most traders make the mistake and connect the first two highs or lows and then get overly excited once the price gets there again. However, a trendline is only confirmed if you can get three points of contact because you can always connect any two random points on your charts.
Upper and lower trendlines
The next question that comes up is whether you draw trendlines connecting the lows or the highs, The answer is very straight forward. During a downtrend, I use the highs and during an uptrend, I use the lows to draw a trendline. This has two benefits: You can use the touches to get into trend-following trades and when the trendline breaks we can use that to trade reversals.
The slope and angles: trend strength
The slope or the angle of trendlines immediately tells you how strong a trend is. A large angle on a lower trendline in an uptrend means that the lows are rising significantly fast and that the momentum is high. The screenshot below shows an uptrend with steadily increasing angles of trendlines. The trend is gaining momentum and the trendlines visualize it perfectly.
Some people will call this the bump and thrust pattern when you see that a trend is suddenly gaining even more strength and then the trend becomes unsustainable at one point.
Reading trend structure
The screenshot below shows a primary downtrend as indicated by the red arrow.
During the primary trend, one can start looking for weak consolidation phases and apply trendlines to those price movements. The low angle of the trendlines indicates that the consolidation does not have a high chance of turning into a real bullish reversal. The sellers still keep pushing the price very close to the bottom of the move, the higher lows are very shallow and the buyers cannot take over the price action. One then just has to wait until the trendline is broken and the downtrend is resumed.
Of course, you won’t always be able to draw a trendline
but if you can find one, they can be high probability trade setups.
