In technical analysis trendlines are another form of support and resistance. These are lines on a chart connecting two consecutive swing lows in an uptrend or swing highs in a downtrend. Generally, the third bounce is the one offering a trading opportunity as the price should find support or resistance and resume its original trend.
Trendlines should be drawn on the highest or lowest price reached (wicks not candlestick bodies) because that is a more objective price, while if you draw them on the bodies because you think the closing price is the most relevant, then you’re not taking into account the timeframe you’re looking at because if you switch the timeframe the closing price will be different making the whole thing subjective and your original trendline “messy”.
You can also use trendlines to mark different chart patterns like triangles, flags and so on. Technically, those are not trendlines because they are not following a trend, but that’s how they are called anyway. So, once you spot your chart pattern that you want to trade, you can mark it up with the trendlines and wait for the price to break out before opening your position.
Regarding flags, the trendlines you use to mark them are also called “counter trendlines” because you use a trendline that is against the overall trend you want to trade into. For example, if you are in a downtrend and the price pullbacks giving you a flag pattern, you will draw a trendline that is against the overall trend.
Lastly, trendlines are used to spot a change in trend once the original trendline is broken. This is basically a momentum study, so if the price can’t sustain the current momentum marked by the trendline, then it needs a deeper pullback once the trendline is broken or it’s the beginning of a completely new trend.
As always don’t base your trading decisions only on technical analysis. You need to have fundamental reasons first to give you the direction and only then use technical to structure your trades.
This article was written by Giuseppe Dellamotta.
