Definition of Trend line
A trend lines are the lines which marks the trend of an asset. It can be bullish or bearish. In an uptrend line, the line joins successive lows. For its part, a downtrend line is a line that joins successive highs.
In a lateral trend or range there are trend lines both at the top and at the bottom, however they are called resistances and supports , respectively.
It is a basic and fundamental tool for technical analysis . For many traders it is a fundamental part of their trading.
How to correctly draw a trend line?
Go ahead, there is no single way to draw trend lines. As part of the technical analysis it involves a part of subjectivity. Subjectivity in the sense of experience. That is, according to the personal experience of each analyst, each one will decide how to draw a trend line.
There are analysts who draw the trend lines by joining the highs and lows of each candle . Like there are analysts who draw trend lines by joining the closings of the candles. There are even those that draw a double trend line. Establishing, in this way, zones.
In any case, we must always bear in mind that to build a trend line, two points are required (at least). These points can be two minimums or two maximums. Of course, the more points you join a trend line, the stronger it will be.
- Trend line joining lows
- Trend lines joining closures
- Trend line by zones
Types of trend lines
We can also classify the trend lines between external and internal. All of the above are external trend lines, as they go on the outside of the quote. The internal trend lines are those that cross the price. That is, the ones that go inside.
Regarding the layout, it is important to mention that the technical analysis evolves and the use of its tools is updated. The most important thing in this type of analysis is, without a doubt, the experience of the analyst.
Trend lines in trading
Many traders use them as buy and sell signals as support or resistance . That is, to form a trend line you need two lows or two highs. That is, two points that project a line. In an uptrend when the price touches the trend line again it could be considered as a long signal . On the contrary, in a downtrend when the price touches the downtrend line again it could be considered as a short signal.
Another use, as the name suggests, is to establish when a market is trending or not. However, this usage is not entirely correct. From a theoretical point of view, a trend consists of increasing highs and lows (upward trend) or decreasing highs and lows (downtrend). In such a way that until a trend does not lose the minimum or maximum of reference it is not considered finished. Technical analysis owes this contribution to Dow theory. In any case, each trader should establish what works best for him based on his own experience.
In any case, to use trend lines in trading it is necessary to establish clear and concise rules. So, they are part of a tested trading system.