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Trendline Trading

Big Idea: Trendlines are another commonly used tool to help traders spot wedges or channels in price action. Trendlines are straight lines that connect one point to another to help investors see where channels form and whether price is nearing a breakout or if it is stuck in consolidation. The way some traders draw these lines can vary from the way others do, so it is mostly subjective which can cause discrepancies in price action. Some traders may even argue that trendlines do not work solely for that reason; but like support and resistance levels, trendlines are used for investors to consider certain areas or zones on where to place their trades.

What to look for 

What traders are mainly looking for is a general area to long or short certain pairs/stocks/crypto based on the overall trend. That way, you can get a near-perfect entry and considerable probability of success in whatever direction you are trading in. For example, if you were bullish on the SPX500, but see that it is in an uptrend, you might want to buy when price comes down to or around its trend line.

EURNZD Example

Here is another example of trend lines in action. You can see that this pair has been trading sideways for some time creating its own highs and lows where each crest and trough sit at around the same level each time. Price finds support at the same price as the last low, and it retraces at the same levels of resistance. These sideways channels are usually areas of consolidation before big moves. And at some point, price will eventually break out, but for the time being, the trend will stay relatively strong.

SPX500 Example

This is a chart of SPX500 on the 1D chart. You can see that a blue, supportive trendline connects all the dips in price on the uptrend. In this case, price is moving in an uptrend, so price comes down only to reach new highs. The red line shows areas of tops where traders take a break by holding, closing or even shorting at those levels so they can buy in again. An upward trend that looks like a staircase such as this example is a healthy move whereas a parabolic jump in price is not. The importance of noticing this trend will help you see when a trade looks safer than a sudden, dramatic jump.

Key Takeaways


-A trend line is a line that connects two or more points on chart to show the overall direction of price action as well as the relative boundaries in which price trades.

-There can be an uptrend, downtrend or sideways trend.

-Trend lines are subjective, so there is no such thing as a perfect way to draw them.

-Trend lines are ways for traders to spot direction and trade in that direction.

Resources

A1 Trading Company

A1 Trading Company is a financial services and media business founded in Atlanta, USA.
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