Trend lines are basic tools applied in the effort of technical analysis. They are widely used in various financial markets to indicate upcoming trends of a market.
As for diagonal lines, trend lines have similar characteristics to resistance and support lines, which is to help provide a space of price indication when prices rise or fall. It is because of this quality, trend lines are applicable when analyzing a market’s upcoming trend.
Types of Trend lines
Trend lines can be divided into two categories based on the trajectory they are taking; ascending, found in bull markets, and descending trend lines, which are indications of a bear market.
Ascending Trend lines
Ascending or uptrend lines that are found in bull markets are drawn diagonally upwards by connecting one or two low points in the market with other low points. The low points that follow the initial are required to be indicated in low points that are higher than the previous, to continuously designate an uptrend market. Furthermore, if at least three correct low points are provided in a trendline, it would become a valid trend line.
This variation of trend lines is characterized by a steep support line, differing from other support line variations which are horizontal, and indicates the increasing market demand, though the asset’s price is simultaneously increasing as well, ultimately displaying signs of a bull market.
Nonetheless, the price graph proceeds to bypass the designated resistance line downwards, it is possible that the market would be heading for reversal.
Descending Trend lines
Descending or downtrend lines are also diagonally drawn lines, however, they are pointed downwards and formed by connecting two high points onwards. Each high point in the market is required to be gradually less in value to form a descending trend. Identical to ascending trend lines, descending ones become valid trend lines when three or more high points are consecutively connected.
In an economic aspect, graph lines settled below the indicated resistance of the trend line displays signs of the market’s supplies that are exceeding demand. This essentially means that the desire to buy the asset is evidently less than its sell demand, even though the price may be at a low rate. All in all, this accumulates to be the leading cause for an asset’s price fall in a continuously ongoing bear market. However, if the price were to be able to bypass the resistance line once again, there would be a high possibility of market reversal.
How to draw Trend lines
There is no definite method when it comes to drawing trend lines. Every analyst tends to have their own perspective and take on the matter. Some use the end of candlesticks to connect the lines and some use the real body. There are a number of ways to construct trend lines, however, all share the same concept, which is that if the line is continuously tested by the asset’s price, it is gradually strengthened and increasingly trustworthy.
Another aspect that reinforces a trend line is the angle in which it displays. The steeper it is, the more strength it is given. Nonetheless, the line could still be easily bypassed and broken down.
When constructing a trend line, it is important to take note that prices do not always progress as planned. Graphs may not reach the set testing point or could even send out false breakouts that could draw new investors to prematurely sell their assets. It is because of this that trend lines are advised to be viewed as “zones”, rather than direct indicators, to manage risks.
Trend line uses
Other than the aforementioned information that trend lines are adept in indicating, two trend lines are also integral in technical analysis as most chart patterns or price channels are still based around the use of two trend lines.
Price channels are parallel lines, one acts as the resistance line and the other, the support. Its job is to help traders maintain their projection of the market’s trend within the two lines.
Chart patterns are essentially patterns that are formed on charts for the means of technical analysis. Two trend lines are normally involved in its structure and are exemplified by the Symmetrical Triangle wherein two trend lines are moving to a point of intersection.
Trading with trend lines
Trend lines are purposeful when indicating the potential direction of a chart. If it were to steeply travel upwards in an uptrend motion, traders would be acknowledged on the matter and henceforth be able to buy or sell assets in correspondence to their needs. This could carry on until the point of breakout.
Though highly beneficial, trend lines are no standard indicators as they are often found to be drawn differently, from varying points in a chart. Therefore, such tools can indefinitely be inaccurate, total reliance on them is not advised, but the matter of risk management and assessment are.