Trend lines

Useful trading tool

Ability to draw trend lines is one of most basic and most useful way to asses market situation and take advantage of it. Before we go into details about how to draw them and interpret their indications lets ask important question:

what are trends anyway?

Market is a constant conflict between buyers and sellers, supply and demand. Price and it's movements are current result of this conflict. Depending on which team is winning price is going up and down. Situation when price is tending to move in one direction for longer time is called trend. If we are looking for daily charts then we see big or major trends - these are most important. Zooming in to shorter timeframes we will notice smaller trends that compose major one. Smaller chart timeframe shows smaller trends which are less important than trends on bigger timeframes. We have three types of trends.

Up trend

Price is moving up. Buyers team is winning because of economic event, global situation or rumors. Local lows are being made higher and higher same as highs.

Down trend

Price is moving down. Sellers team is winning because of the same factors that buyers are winning during up trend.

Sideways

Buyers and sellers are in balance. Price is not moving significantly into any direction remaining in a range. Random price movements inside range can be quite aggressive until it break out from it, one of teams starts winning and starting new trend. 

Trend lines are useful tool to indicate where price should bounce to continue trend or where trend is breaking. We will use local lows for drawing up trend line and local highs to draw down trend lines. To draw sideways range we will use both highs and lows. Lets look at picture:

As you can see trend line is straight line that is going through following lows. Price here is bouncing from it giving good places for entering long position. These occasional downward moves that are ending at trend line are called corrections or discounts.

Similairly when drawing down trend line we'll use local highs as shown on below picture:

Looking at the big picture

Most important while using trendlines is looking at whole market situation. It is advised to take positions according to major trends even if minor trend shows opposite trends. To draw trend line we need two local highs or lows third one will confirm if trend is established. Usually when price is about to touch major trend line, on shorter term charts it is moving pretty aggresively. Thats why positions are more risky in such times as many uncertain traders are changing teams rapidly.