May 17, 2021, | AtoZ Markets – If we are to name a common form of technical analysis, we can say trend lines. However, even though it is considered common, it is also an underutilized one as people do not use it to its fullest.
What are trend lines?
A trend can guarantee a hundred- percent precision as long as it was drawn precisely as well. The only problem is that traders are having a hard time using this kind of form. Traders usually do not or cannot correctly draw them. Some do not even try to fit the line with the market rather than the opposite way.
We form technical analysis when we make assumptions of price trends, and the primary roles of trend lines are trend identification and confirmation. Trend lines are straight lines and connect two or more price points. It further extends to the future and becomes a line of support or resistance. If you are aware of support and resistance level principles, we can say that most are similar to the trend line principles.
In short, this article helps us to understand trend lines, but reading and understanding support and resistance before everything else will be a big help.
The basic form of trends lines
The first one will be the uptrend, also known as ascending trend line. It is a positive slope, and it forms if we connect two or more low points. We should note that the second point should always be higher than the first to have a positive slope. It is also essential to know that we should at least connect a minimum of three points so that our trend line can be a confirmed one.
Uptrends represent support while indicating that the net demand increases even when the price rises as well. Buyers become determined when they see a rising price and demand combination since this is too bullish. The uptrend is strong if the price remains higher than the uptrend line. Once the price goes lower than the uptrend line, it means weaker net demand and a possible trend change. We draw uptrend lines along the bottom of identifiable valleys.
The other one would be the downtrend, also known as descending trend line. It is very similar to the uptrend; the only difference is that it is its exact opposite. It also forms as we connect two or more high points, and the second one should always be lower than the first one to have a negative slope. There should be at least three connected points to become a confirmed trend line. Downtrends represent support, and they indicate that the net supply increases even while the price declines. Sellers become determined when they see a decreasing price and increasing supply combination since it is bearish. Downtrends are strong if they are below the downtrend line. Once the price goes higher than the downtrend line, it means declining net- supply and a possible trend change. We draw downtrend lines along the top of peaks.
Important points to remember
To draw trend lines, you simply locate significant tops or bottoms then connect them. The three types of trends are uptrends or higher highs, downtrends or lower highs, and sideways or ranging. A trend line is valid if there are at least two tops or bottoms but is confirmed if there are three or more. A steeper drawing means lesser reliability. More tests suggest stronger trend lines. If a trend line does not fit the market, do not force it as there is a big possibility that it is not valid.