In the basic theory of Technical Analysis, there is an extremely important method, that is, Trend Analysis. And the most important tool in Trend Analysis is linear analysis. In a rising market, the line connecting two or more low price points and in a falling market, the line connecting two or more high price points is called a Trend Line. The former is called an Uptrend Line and the latter is called a Downtrend Line.
1. How to draw a good Trend Line?
I. Determine key price points
Initially, it is essential to identify key price points in the price chart. In a rising market, locate obvious low price points. In a falling market, find distinct high price points. These price points should be relatively representative and influential, typically those positions that attract market attention or trigger frequent trading activities over a certain period.
II. Connect price points
For an uptrend line, link two or more low price points with a straight line. During the connection process, ensure that the line is as close as possible to more low price points without being overly contrived to fit individual points and losing overall accuracy. Similarly, for a downtrend line, connect two or more high price points.
III. Adjust and verify
After drawing the trend line, continuous adjustment and verification are required. As new price data emerges, observe whether the trend line can still accurately reflect the price movement. If a significant deviation between the trend line and the actual price trend is detected, re-examine the selected price points and adjust the trend line. At the same time, the effectiveness of the trend line can be verified by observing the price reaction near the trend line. For instance, if the price finds support near the uptrend line and rebounds, or encounters resistance near the downtrend line and falls back, it can enhance confidence in the effectiveness of the trend line.
2. How can we judge the validity of a Trend Line?
I. Frequency of price contact with the trend line
If the price touches the trend line multiple times and exhibits obvious support or resistance near it, then the trend line is more effective. For instance, in an uptrend, if the price pulls back to the vicinity of the trend line several times and then resumes its upward movement, it indicates that the trend line provides effective support. Generally speaking, the more times the price comes into contact with the trend line, the stronger the reliability of the trend line.
II. Time span of the trend line
A trend line with a longer time span is typically more effective than one formed in a short period. This is because a trend line with a long duration has undergone more market tests and can better reflect the long-term trend of the market. For example, an uptrend line formed over several months or even longer is more convincing than a trend line formed in just a few days.
III. Angle of the trend line
A moderate angle for the trend line is ideal. An overly steep trend line is often difficult to sustain and may be broken soon. An overly gentle trend line may suggest a weaker trend. Generally speaking, a trend line between 30 and 60 degrees is relatively stable and effective.
IV. Coordination with trading volume
When the price moves along the trend line, if the trading volume also shows a corresponding change trend, the effectiveness of the trend line will increase. For example, in an uptrend, an increase in price is accompanied by an expansion of trading volume, and when it pulls back to near the trend line, the trading volume decreases, indicating that the market has a high degree of recognition of the trend.
V. Consistency with other technical analysis tools
If the trend line is consistent with the analysis results of other technical analysis tools such as moving averages and the Relative Strength Index (RSI), then the validity of the trend line will be further confirmed. For example, when the trend line shows an uptrend, and at the same time, the moving averages also display a bullish arrangement and the RSI is in a strong area, this enhances the judgment of the uptrend.
3. How can we conduct Trend Analysis using trend lines?
I. Determine the trend direction
The slope of the trend line can be observed to determine the direction of the market trend. If the trend line is inclined upward, the market is in an uptrend; if the trend line is inclined downward, the market is in a downtrend. For instance, when a series of continuously rising low points are connected to form an uptrend line, it indicates that the price is generally rising step by step and the bullish force is dominant.
II. Assess the trend strength
The slope and stability of the trend line can reflect the strength of the trend. A steeper trend line typically implies a stronger trend, but it may also be more easily broken. A relatively gentle and stable trend line may suggest a more moderate yet continuous trend. For example, during a period of rapid price increase, the slope of the trend line is large, indicating strong bullish power. However, this trend may be difficult to sustain for a long time. In a slow uptrend, the trend line is relatively gentle. Although the increase speed is not fast, it may have better sustainability.
III. Locate support and resistance levels
Trend lines can act as support and resistance levels. In an uptrend, the trend line usually serves as a support. When the price pulls back to near the trend line, it often finds support and continues to rise. In a downtrend, the trend line becomes a resistance level. When the price rebounds to near the trend line, it may encounter resistance and continue to fall. For example, when the price in an uptrend falls back to near the trend line and stops falling and rebounds multiple times here, it further confirms the support function of the trend line.
IV. Confirm trend reversal
When the price effectively breaks through the trend line, it may signal a trend reversal. However, just one breakthrough does not necessarily determine the trend reversal. It needs to be comprehensively judged in combination with other technical indicators and market conditions. For example, if the price in a downtrend breaks through the downtrend line, accompanied by an increase in trading volume and an improvement in other technical indicators, then the possibility of trend reversal will increase.
V. Combine with other analysis tools
Trend line analysis can be used in conjunction with other technical analysis tools to enhance the accuracy of analysis. For example, it can be combined with moving averages, the Relative Strength Index (RSI), and so on. Moving averages can help confirm the stability of the trend, and RSI can provide information on overbought and oversold conditions in the market. When trend lines, moving averages, RSI, and other indicators all point in the same trend direction, the reliability of the analysis will be higher.
Reproduction Notes：InvestFancy » How to use the Trend Line?