Trendlines Trading – Video Tutorial

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TRENDLINE TRADING

Trendlines serve as support and resistance levels and are manually drawn to the trading charts. Trendlines connect highs and lows in certain period. Trendlines help us define a trading channel and levels where there is greater potential of price pullbacks or breakouts. Learn how to draw trendlines.

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How to Draw Trendlines

RSI is a commonly used indicator, which is often combined with other indicators. Relative strength index can serve as a main indicator or as a confirmation indicator within many different trading strategies and systems. RSI indicator defines the strength or weakness of a traded asset, based on the closing prices in a selected time period.

RSI is an oscillator, which means it moves (oscillates) between the levels of 0 and 100. The default period setting for RSI is 14. Most commonly used are periods from 10 to 14, regardless of the time frame. Lower period settings will give more overbought and oversold signals and higher period settings will give less signals, however these are considered to be stronger. RSI levels below 30 are considered as oversold conditions and imply that the price should reverse and move up and levels above 70 are considered as overbought conditions and imply that the price should reverse downwards.

Trendline Trading with Binary Options

When trading binary options, RSI Indicator can help us find profitable entry positions for market reversals in the overbought (above 70) or oversold (below 30) markets and also avoid bad trades in direction of continuation of the trends. By default it is not advised to enter up trades when RSI is above 70, or down trades when RSI is below 30, unless breakouts are being traded.

For more precise trade entries it is advised to combine RSI indicator with other support and resistance indicators, such as manually drawn horizontal support and resistance lines, trend lines or Fibonacci indicator. Understanding price action and candlestick patterns in the RSI overbought and oversold zones can give us strong signals for trading short pullbacks or longer reversal trade entries.

Trendlines are a very basic yet powerful tool used in technical analysis (analyzing stock charts). They are used to illuminate the general direction of a stock’s price movement.

Trendlines are based on the idea that a stock, or the market, moves in trends (upwards, downwards, and sideways). It can be assumed that prices will continue in the direction of the trend until the trend is broken.

Trends can be narrowed down into three time frames:

  1. Short Term Trend
  2. Intermediate Term Trend
  3. Long Term Trend

There is not a set time frame (days, weeks, months, etc.) that can define each of these. It depends on what charting time frame you’re referring to.

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A 6-month daily stock chart will have a different definition for a short, intermediate, and long term trend then a 1-month daily chart.

Probably the most important aspect is to use all three time frames to give you the overall big picture of how the stock is behaving. You’ll also use all three time frames to ensure you are “swimming with the current and not against it”.

Have you ever tried to paddle a boat, or swim against a river current? It’s hard!

You utilize all this energy and effort, and you hardly go anywhere. Swimming against the current is not a smart thing to do unless you have a specific purpose for doing so.

Well trading “against” the direction of the trend is the same thing.

It can be done, and you can make money, but trading in the same direction of the trend is easier and it will increase your chances of making a profit.

Always look at the short, intermediate, and long term trend to ensure you are staying in sync with the general direction of the stock market.

So What are Trendlines?

Trendlines are straight lines that are drawn on a stock chart along at least two price highs or price lows.

The general rule of thumb is that it takes two points to draw the trendline and a third point confirms the validity of the line (it’s taken seriously). The price highs or lows are the points.

The trendline becomes more significant (stronger) as more prices touch the line.

There are three types of trends:

  1. Downward Trend (Bearish)
  2. Upward Trend (Bullish)
  3. Side to Side (Channeling)

Trendlines are primarily used to manage trades and to help you see when or if the trend is changing.

Downward Trendlines.

A downward trendline is used when prices have been falling. You construct a downward trendline by drawing a straight line “down and to the right” across price highs. All price action is below the trendline:

Make sure to get as many price highs to touch the line as you can, but not all points have to be exactly on the line.

As long as prices stay below the trendline, the downward trend is considered intact.

Bearish trading strategies and downward trendlines are a great compliment to each other.

Upward Trendlines.

An upward trendline is used when prices have been rising. An upward trendline is constructed by drawing a straight line “up and to the right” across price lows:

Make sure to get as many price lows to touch the line as you can, but not all points have to be exactly on the line.

As long as prices stay above the trendline the uptrend is considered intact.

Bullish trading strategies and upward trendlines are a great compliment to each other.

Side to Side Trend (a Channel).

A side to side trend is often called a channel. It’s when stock prices have been moving up and down between two parallel price barriers.

To construct the trendlines for a channel you draw a horizontal line across price highs AND across price lows. The area between these two lines is called the channel.

Prices are bound by the two parallel price barriers which are illuminated by the lines. The upper line is commonly referred to as the resistance level and the lower line is referred to as the support level.

Support and resistance are two concepts we will discuss in the next lesson.

Many traders make the mistake of assuming that a trend is changing just because the stock price closes outside of the trendline.

While this may be the case, there are generally three situations that can occur if the stock closes outside of the trendline:

  1. Prices will stay outside of the trendline for a day or two, and then drift back into their previous direction.
  2. Prices will break the trendline and drift in a horizontal channel for a period of time.
  3. Prices will break the trendline and create a new trend in the opposite direction.

Using a trendline can help you maximize profits and minimize losses. You can also use them for trade entry and exit signals.

Trading with Trendlines.

Trendlines have a number of purposes in regards to trading. They can be used to manage trades, time trade entry and exit, and as a style of trading.

The two trading styles I will focus on are.

  • Trendline Breaks (aka Breakouts)
  • Trendline Bounces (aka Buying on the Dip)

Trendline breaks are trend reversal trades. They occur when prices break or drift outside of the current trend and start a new trend:

In this case prices did in fact start a new upward trend. To trade this kind of trendline break (downward trend) you would buy a call option when prices break outside of the downward trendline.

It’s the opposite for an upward trendline. As an upward trendline is broken you would buy a put option.

If a stock closes outside of a trendline, always asses the volume and “how” it broke outside of the trend. In the case above there was a large gap in price action and higher volume.

Because of the gap in prices and the higher volume (aggressive movement), this would be considered an “upside breakout”. The high volume and gap in prices strengthens the possibility that this is a valid trend change.

Trendline bounces are trend continuation trades. You would participate in this type of trade if you expect prices to continue in the direction of the trend.

A trendline bounce occurs when prices move (dip) toward the line, touch it, then bounces off and reverses back into their original direction:

In the case above we have an upward trend. Ideally you would buy a call option when prices touch the trendline (blue arrows). After the stock bounces off the line and continues back upward, your call option will begin to gain value.

Once your call option gains enough value, you can sell it for a profit and wait for the next opportunity to “buy on the dip”.

This method of trading is also suitable for stocks that are trending in a channel.

In my experience, trading purely off of trendlines is tricky, yet possible. I would advise using additional confirming indicators if you are going to employ this strategy.

It’s easy looking at a stock chart in hindsight and saying, “Wow, if I would have bought here or there, I would have made a lot of money“. Making money is not the problem.

The problem that arises is that in predicting the future while looking at a chart in the present can be difficult.

You see that prices have touched or broken the trendline and you essentially have to have faith that what you “think” will happen will indeed happen. You may begin to doubt yourself or become overly anxious.

Trendlines are tools and they are fairly accurate, but nothing is 100% guaranteed. With a little patience and discipline, it is possible to make money trading trendlines.

Trendlines are an important part of technical analysis and you should use them whenever you can. Keep in mind though that some charts are not trendline friendly.

If you find a chart where prices do not fit well with a trendline, then don’t try to force it to work. Sometimes it can be difficult to find enough points to construct a trendline.

You’ll have more profitable trades if you just let things flow naturally.

Lesson Review.

Trendlines are straight lines that are drawn on a stock chart along at least two price highs or price lows. They are used to illuminate the general direction of a stock’s price movement.

There are three directions that prices can trend in:

Two common methods for trading with trendlines are trendline bounces and trendline breaks.

When you’re looking at a stock chart, be mindful of the short, intermediate, and long term trend. If all three are generally trending in the same direction, then you’ll have a greater chance of making a profit.

Swim with the current, not against it!

In the next lesson we’ll discuss another aspect of technical analysis that will aid you in better understanding stock charts: Support and Resistance.

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The Complete Guide to Trend Line Trading

Last Updated on November 20, 2020

Trend Line is one of the most versatile tools in trading.

However, most traders get it wrong.

They draw Trend Lines looking like this…

I know I’m exaggerating, but you get my point.

That’s why in today’s post, you’ll learn:

Or if you prefer, you can watch this training below…

What is a Trend Line and how does it work

You know Support and Resistance are horizontal areas on your chart that shows potential buying/selling pressure.

And it’s the same for Trend Line.

The only difference is… a Trend Line isn’t horizontal but sloping.

Here’s a Trend Line example:

So here’s my definition of it:

Upward Trend Line: “Sloping” area on the chart that shows upward buying pressure.

Downward Trend Line: “Sloping” area on the chart that shows downward selling pressure.

Now before I dive into specific Trend Line strategies and techniques, you must first learn how to draw a Trend Line correctly.

And that’s what I’ll cover next.

How to Draw a Trend Line correctly

First, let’s learn how NOT to draw your Trend Line.

Here’s a bad example:

Clearly, this is garbage.

How do you know which Trend Lines are important? And which to ignore?

So listen carefully:

Here’s how to draw a Trend Line correctly…

  1. Focus only on the major swing points and ignore everything else
  2. Connect at least 2 major swing points
  3. Adjust it so that you get the most number of touches (whether it’s body or wick)

Here’s a Trend Line example:

Pro Tip:

You can draw 2 parallel Trend Line to define the area on your chart.

Here’s an example…

Unlike Support and Resistance where you can just draw once and leave it, Trend Line needs “adjustment”.

This happens when the price breaks the Trend Line and then recovers — and you need to “adjust” the Trend Line to fit the recent price action.

You’ll learn how Trend Lines can improve your trading results…

How to use Trend Line to identify the direction of the trend — and tell when the market condition has changed

All you need to do is draw your Trend Line and ask yourself…

“Is the Trend Line pointing higher or lower?”

If it’s higher, then the market is in an uptrend (and vice versa).

But that’s not all.

Because a Trend Line can also alert you when market conditions are changing.

By paying attention to the steepness of the Trend Line.

If your Trend Line is getting flatter, it means the market is moving into a range condition.

And if your Trend Line is getting steeper, it means the trend is becoming stronger (or possibly going into a buying climax).

Is this important?

Because if you know market conditions are changing, you can adjust your trading strategy accordingly.

And not use the same “trick” for all market conditions — which is a recipe for disaster.

Trend Line Trading: How to better time your entries

If you want to find good trading opportunities, then you must trade near the Trend Line.

This allows you to have a tighter stop loss on your trades — which improves your risk to reward.

But that’s not all…

Because if you combine Trend Line with Support and Resistance, that’s where you find the best trading opportunities.

Here’s what I mean…

Now you might wonder:

“So when do I enter a trade?”

Well, you can use reversal candlestick patterns (like the Hammer, Bullish Engulfing, etc.) as your entry trigger.

This means you’re only entering a trade when the market has “bounced off” the Trend Line and likely to move higher.

Here’s an example:

This is powerful stuff, right?

The Trend Line Breakout Strategy

It can be difficult to time your entries in a trending market because the pullback can be deep or shallow.

If the pullback is deep and you enter your trades too early, you have to suffer a lot of “pain”.

But if the pullback is shallow and you enter your trades too late, you risk missing the move.

So, what’s the solution?

Introducing The Trend Line Breakout technique.

Here’s how it works…

  1. Wait for a pullback in an uptrend
  2. Draw a Trend Line connecting the highs of the pullback
  3. If the price breaks the Trend Line, then enter the trade

Here’s an example:

Here’s the logic behind it…

If the price breaks above the Trend Line, it tells you the buyers are in control and the trend is likely to resume.

If it doesn’t, then it means the sellers are still in control and you want to stay on the sidelines till the buyers regained control.

Does it make sense?

  1. Draw an upward Trend Line
  2. Trail your stop loss below the Trend Line
  3. Exit the trade if the price closes below the Trend Line

Here’s an example…

This technique won’t work well when the trend goes parabolic because you risk giving back a lot of open profits.

“How do I know when a trend is parabolic?”

Here are 2 things to watch for…

  1. The trend lines get steeper (almost like a straight line)
  2. The range of the candles get larger

If #1 and #2 occurs, then the market is likely to be in a parabolic move.

And in such cases, you want to trail your stop loss on the current market swing and exit the trade if the price closes below it.

Here’s an example…

How to use Trend Line and identify trend reversal

Has this ever happen to you?

You see, the price break above the downward Trend Line and you think to yourself…

“The market is about to reverse higher because the Trend Line is broken.”

The next thing you know, the market heads lower, and the downtrend resumes itself.

Wtf, what’s going on?

Well here’s the deal:

Just because a Trend Line breaks doesn’t mean the trend is over.

You’ve learned that a Trend Line needs regular “adjustment” as the market tends to have such a false breakdown.

So the question is…

How do you identify a trend reversal (to the upside)?

Well, here’s a 3-step technique you can use…

  1. Wait for the price to break above the Trend Line
  2. Wait for a higher low to form (this tells you the sellers have exhausted themselves)
  3. If the price breaks the swing high, the market is likely to reverse higher (the buyers are now in control)

Here’s an example…

Now if you want to learn more, go read this post… How to Identify Trend Reversals without any Indicators

Conclusion

So here’s what you’ve learned:

  • When you draw a Trend Line: 1) Focus on the major swing points 2) Connect the major swing points 3) Adjust the Trend Line and get as many touches as possible
  • The steepness of a Trend Line gives you clues about the market condition so you can adjust your trading strategy accordingly
  • The Trend Line Breakout technique helps you time your entry in a trending market
  • You can use a Trend Line to trail your stop loss and ride massive trends
  • If a Trend Line breaks, wait for the re-test and see if it holds. If it does, the market is likely to reverse in the opposite direction.

Now over to you…

How do you use Trend Line in your trading?

Leave a comment below and share your thoughts with me.

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