The Ideal Trend Line was written by CryptoTutor, and it’s included in issue #8 of 21Cryptos Magazine. To read more articles like this subscribe today. To read other free articles check out our Magazine category. Follow us on Instagram, Facebook and LinkedIn.
This article is from an earlier date and as such can contain figures that were actual at time of writing.
In this lesson I will go through one of the most basic TA subjects there is, namely the trend line.
It is a very basic tool which helps traders to recognize potential support or resistance levels. Although some experienced traders argue that the trend line does not always provide a solution for finding support or resistance levels, my experience is that the trend line can be very useful when taking profits or when trying to determine a breakdown level. One simply cannot draw lines and expect them to act as a trend line. There are certain rules which should be abided to in order to have valid trend lines which yield reliable signals.
The ideal trend line has at least three confirmations on a higher timeframe. These confirmations can be either based on candle close values, candle low or high values, or both. Preferred are trend lines which are based on candle close values, as these yield the best results on the higher timeframes.
A trend line could be drawn based on two confirmations as well, but the two confirmations trend line will be much less reliable than the three confirmations trend line. Trend lines on the lower timeframes (e.g. the 5 minutes or the 15 minutes timeframe) tend to turn out invalid more often compared to the higher timeframes (4 hour or 1 day timeframe), due to volatile movements. But they certainly can be drawn on lower timeframes, depending on the timeframe of the trade. Trendlines which are based solely on candle shadows (low or high values) may yield less reliable results, due to the existence of bear and bull traps.
Depending on the situation, trend lines might indicate more than just support and/or resistance levels. They may indicate consolidation of the price, which might lead to the formation of a chart pattern, for example, the rising wedge OR the falling wedge chart patterns. Also, trend lines can indicate a certain channel (ascending OR descending) in which the price consolidates before making a larger move with momentum.
I have drawn two trend lines: one is based on candle close values, and the other is based on candle low values—one acts as support, and the other acts as resistance for the price. Before finding the trend line I want to work with, I tried to draw several trend lines to see which will likely yield the most reliable results.
The below example shows a chart based on the daily timeframe, in which both trendlines are based on the daily candle close values. It can be seen that the support trend line has 4 (or 5, which is arguable) confirmations, and that the current daily candle is trading below the trend line.
However, this trend line is based on candle close values, so for a confirmation of a breakdown, the current daily candle would need to close below the trend line. The daily candle still has time left to close above the trend line and prevent a breakdown. On the other hand, the resistance trend line has only two confirmations. This is a weak trend line, and thus could be easily proven invalid by a daily candle close above the trend line.
The trend line remains a simple tool but can be very effective when being used correctly. Especially with trend lines (as they are very subjective), always try to use the one with the most reliable confirmations. By doing that, the probability of experiencing fake-outs will be decreased severely.