How to Draw Trendlines and Their ImportanceHi,
In this idea I will try to throw some light upon the traders' favorite tool, that is trendlines (also known as dynamic support and resistance). Trendlines represent the direction of trend- up or down. They also indicate the strength of the trend. Steeper trendlines means more momentum than a less steeper trendline.
The following discussion would focus mainly upon:
✅How to draw trendlines &
✅Importance of trendlines
Let us discuss these topics one by one.
✅How to draw a trendline?
For drawing a trendline, we need at least two touch points. Join the two points and extend the line forward.
These two touch points could be:
1. A low made by the stock in a correction and a swing low/trough/valley made due to a pullback
2. Two troughs/valleys on the chart, made during pullbacks/consolidation
see chart 👇
There are higher chances that the price will hold the trendline during subsequent touches.
✅The steeper ones will need adjustments
A sharp price wave on a chart may have shallow pullbacks. This leads to a steeper trendline. This is because more traders sitting on the sidelines wanted to get in quickly, so as not to miss out the move.
These sharper trendlines are less likely to hold and may soon need to be adjusted as the price progresses.
See chart 👇
✅Breakout of a down-trendline
During corrections you might have the urge to connect swing lows without including the lowest point. There is nothing wrong in it. Price often takes support from these lines too but we need to trade with caution in such cases.
When the price breaks an up-trendline (yellow), we need to wait as the price may change behavior and starts forming lower peaks/highs. This offers us an opportunity to draw a down-trendline (red). We don't need to buy before the price breaks out of this down-trendline.
See 👇
As the price makes new highs, we again join the lowest low (base) and the most recent larger swing low to make a new trendline.
See 👇
✅What is meant by a valid trendline?
Many users might have different verdicts for the validity of a trendline but I am sure they would all agree upon one thing, that is touch points. The more the touch points available to draw a trendline, the better. More touch points offer validity and solidarity to the trendline. And hence more chances for traders to take high probability trades near the trendline. See the chart above 👆
✅Invalidation and Breakdown
As I said before, the steeper trendlines are less likely to hold for long. They may lead to a correction or a pullback. At one point the major trendline would also be invalidated. This would happen when the price manages to break the most recent attempt (swing low at the trendline) to hold the trendline. This often leads to a steep fall or a long term correction.
✅Up-trendline as resistance
We all know that horizontal support and resistance levels once taken out, reverse their role. Resistance once broken turns out to be support and vice versa. The same is true for dynamic support and resistance levels (trendlines) As the price breaks an up-trendline and then approaches it again, it tends to react. The same is true for down-trendline.
Also notice that we have a major down-trendline (red) which is in action and it had a nice confluence with the up-trendline (yellow). The price hit that confluence and reacted.
I just hope that this information would be useful for some traders.
Thanks for reading.
