Keep reading to learn some tips that can help you effectively use trendlines as part of your trading strategy. When prices are rising, connecting the lows with a line results in an ascending trendline—an “uptrend.” A trendline can also be drawn along the highs of the trend. This shows the angle of ascent, the strength of the price move, and the relative strength of the trend. When the price falls, the highs fall. Connecting these falling highs results in a descending trendline—a “downtrend.” A trendline can also be drawn along the lows to highlight the angle of descent and the strength of the downward price movement. Trendlines at steep angles typically have short lives, since prices cannot sustain a near-vertical rise or fall for long. Shallower trendlines are more stable and easier to maintain. Drawing trendlines whenever possible and on multiple time frames can aid new traders in spotting the overall trend, small trends, and corrections within those small trends. During an uptrend, opportunities to buy or go long may occur when a short-term downtrend meets the overall ascending trendline. During a downtrend, selling or shorting opportunities may occur when a short-term uptrend meets the overall descending trendline. To figure out whether your trendline needs adjusting, watch for any instances when the price breaks through your lines. If the price moves below your trendline in an uptrend, then you need to adjust your line. The same goes for downtrends when the price moves above the trendline. Keep in mind that adjusting a trendline doesn’t mean the trend has changed. An uptrend is characterized by higher highs and higher lows, and as long as those keep happening, it’s still an uptrend. You may find that you adjust your trendlines several times within a single uptrend. While you can use trendlines as a guide, you must use more precise criteria for determining when to enter or exit a trade. These criteria could include a certain size move back in the trending direction, a trigger based on an engulfing pattern (where the next bar is larger than the previous one, engulfing it), or another type of indicator that adjusts more precisely and quickly to changes in volatility. If you use trendlines as just a guide, then you don’t need to worry about drawing trendlines along the exact highs or lows. Draw “trendlines of best fit”—the ones that provide visual clues about potential trade areas. Since the trendline isn’t being used as a specific trade signal, rough trendlines can provide you with relevant information about the trend without forcing you to readjust it constantly. A trendline needs to be adjusted often, especially when day trading. Use a “trendline of best fit” to avoid constantly adjusting. It still shows the trend and when the trend may be reversing. Use trendlines to alert you of potential trade opportunities, and use price action signals to determine exactly how to seize those opportunities.
