What are trendlines? Why do we draw them?
As the name implies, trendlines are levels used in technical analysis that can be drawn along a trend to represent either support or resistance, depending on the direction of the trend. Think of them as the diagonal equivalent of horizontal support and resistance.
Why do we draw the trendlines the way we do?
Here’s how you do it:
- Define your timeframe
- Zoom out (300 bars)
- Draw Trendlines that connect at least 2 major swing points
- Adjust to get as many touches as possible
1. Define your time frame
For example, if you trade on a daily period, you should draw it on a daily timeframe. It makes little sense to draw a Trendline on a 15-minute, 30-minute, or 1-hour time period. Because it has no bearing on your trading demands. Your trading requirements are on a daily basis. That is your entry time window, which you should be drafting on a daily basis.
You can use the weekly timeframe, which is one timeframe higher. However, you do not want to create your Trendlines on a slower timescale. Always start by defining your timetable. Then, using the timeframe you’ve set for yourself, draw your Trendlines.
2. Zoom out (300 bars)
You want to zoom out your charts.
Because when you look at a chart, it’s very easy to get caught up in the current price action now. But if you take a step a step back, you’ll see that the price action is much more obvious. So if you zoom out your charts, you’ll see the big picture and know where you are in the grand scheme of things.
- Zooming out can be subjective, but my advice is to have at least 300 bars on your chart.
- It also depends on the screen you’re trading from.
- A trader on a 20-inch screen and a trader on a 50-inch screen will zoom out differently.
- To be objective here, I would say at least 300 bars on your chart.
3. Draw Trendlines that connect at least 2 major swing points
At least two major swing points should be connected by trendlines. And I accomplish this by linking the two critical swing points. This means that I pay less attention to minor swing points than I do to major swing points. Because powerful long-term trends are defined by trendlines with substantial swing points.
Those are the ones you should focus on because they are obvious and important. Minor ones will become more apparent if you trade on a lower timeframe. However, depending on the timing, those tiny swing points can be viewed as secondary.
4. Adjust to get as many touches as possible
This is equivalent to “curve-fitting” your Trendlines to the price data you have. You’ll tweak it so that you get as many touches as possible. It may come into contact with the body or the wick of the candles.
Keys to Drawing TrendLines Effectively
There are three very important keys to drawing effective trend lines.
- Higher time frames will always produce the most consistent trend lines, so begin there and work your way down.
- Most trend lines will have some overlap from the high or low of a candle, but the key thing is to acquire as many touches as possible without cutting through the body of a candle.
- Never try to force a trend line to fit the chart; if it doesn’t fit, it isn’t valid and isn’t worth putting on your chart.
What is the purpose of drawing a trendline?
Trendlines can tell us about the trend
A trendline might indicate the continuation of a trend (if it is followed), a reversal, or a larger downturn in a higher timeframe (if broken). Once we understand when and how new imbalances are formed, trendlines will assist us in identifying the trend.
Learn when the dynamics of a chart are changing
By connecting the trendlines to the manner we do, you will be alerted as soon as the dynamics of timeframe X change. This is critical in a top-down examination. It will provide us with a systematic approach to multiple timeframe analysis that other trendline techniques lack.
Quickly learn if opposing impulsive moves are stronger than previous ones.
What would you think if the trend is down and negative impulses are being generated, yet the following impulse is bullish and stronger than the last bearish impulse? Wouldn’t you expect the market dynamics during that era to shift? Exactly. That is why you will learn to create trendlines precisely.
Identifying potential reversals.
A break in the trendline will assist us in identifying fresh potential instabilities. This is critical for comprehending various timeframe analyses. We will investigate this in more detail in a further lesson.
The pullback to a trendline can provide us with trade opportunities.
In a clear trend, the pullback to a trendline can provide us with trade opportunities.
How is a bullish trendline drawn?
The following description describes how to draw a bullish trendline. A bearish trendline will do the same thing, but it will be inverted, linking two peaks.
- Connect the latest two obvious valleys (swing lows) and peaks (swing highs). These troughs and peaks must be visible; if they are not, consider their pauses or CPs. If they are not clear, the basis should be unclear and poor, and removal is inevitable.
- As you get more experience reading price activity, you will notice valleys and peaks that you were previously unaware of.
- Each era has its own trendline that is independent of the others, and this is where subjectivity comes into play in different approaches
- Trendlines will not be connected using Continuation Patterns (CPs).
- Never cut through candles. What exactly does this mean? That is, trendlines cannot pass through wicks or candlestick bodies. You must link the most recent peaks and/or troughs with care, taking care not to cut through the candles, wicks, or candlestick bodies.
How is a bearish trendline drawn?
- Look for tilted “inverted W shapes” with the second high [P2] slightly lower than the first high [P1].
- At [P1] and [P2], two bearish impulses must be generated.
- The second impulse’s [L2] low must be lower than the first impulse’s [L1] low.
- This happens exactly at the red circle at [L2].
- The second peak’s high at [P2] should not be higher than the first peak’s high at [P1].
- A bearish trendline can connect peaks [P1 and P2] after the price makes a low lower than [L1].
- Connect the most recent two peaks or swing highs, [P1] and [P2].
- We’ll have to change the trendline and connect peak [P2] with a new peak [P3] every time a new peak is printed.
Can we use continuation patterns to draw a trendline?
When drawing a trendline, we are not permitted to employ continuation patterns. They are not the cause of impulsive moves, and they just serve to perpetuate the underlying tendency. Valleys and peaks must constantly be used.
A thousand words are worth a thousand images. We will not use continuation patterns at  and  to build a red trendline on the USD/CAD H4 chart below since that trendline is bogus. The trendline that connects the past two bullish impulses is the proper one.
Is cutting through candles allowed when drawing a trendline?
When drawing a trendline, it is not permitted to chop through candles. Price action must be respected and avoided at all costs. Adjust the trendline so that candlesticks are taken into account.
See the figure below; the red trendline is correct because it does not cut through candles.
How are trendlines drawn in over–extension?
In cases of over-extension with three or more consecutive CPs, the trendlines connecting the last three CPs can be drawn more aggressively. Below is an example of a bearish over-extension on the Gold XAUUSD weekly period.