In the financial landscape, trend lines appear as diagonal lines that are drawn on price charts. These lines link particular data points, offering convenience to traders and chartists to visualize diverse price movements as well as detect market trends. This article offers exclusive insights into trend lines, their role, as well as formation on the price charts.
Introduction to Trend Lines
Trend Lines serve as the fundamental tools facilitating technical analysis. These lines play a crucial role in stock, derivative, crypto, and fiat markets. Fundamentally, trend lines operate like resistance and support levels for a specific asset. However, they are reportedly made of diagonals rather than horizontal lines. In this respect, trend lines can have negative or positive slope. Usually, the increased slope is translated as the stronger trend.
One can divide the respective trend lines into descending (downtrend) and ascending (uptrend) categories. Particularly, an uptrend line starts from a lower chart position, moving toward a higher one. It links a minimum of 2 low points. On the other hand, a downtrend begins from a higher chart position to conclude at a lower one. It links a minimum of 2 high points.
Hence, the distinction between the above-mentioned trend line types takes into account choosing the points that are utilized for their drawing. In the case of an uptrend, the lines are to be drawn by utilizing the lowest chart points, including candlestick bottoms that form higher lows. Contrarily, downtrend lines are potentially drawn by utilizing the topmost values, including candlestick tops that form lower highs.
Using Trend Lines in Price Charts
In line with the lows and highs of a price chart, trend lines signify where the price slightly challenged the existing trend, effectively tested it, as well as turned back in favor. The line can be expanded to attempt as well as predict crucial levels to take place in the future. The trend line may be significantly tested many times. Nonetheless, until it remains intact without being broken, the trend line is deemed valid.
Apart from that, though trend lines have use cases in each type of data chart, their usual application takes into account financial charts that include market prices. Additionally, they provide insights into the broader market demand and supply. Normally, upward trend lines signify a surging buying force, highlighting higher demand in comparison with supply. Additionally, downward trend lines relate to persistent price dips, indicating the opposite, suggesting that supply is stronger in comparison with demand.
Nonetheless, in such analyses, trading volume also needs to be taken into consideration. For example, if the price is spiking, but the volume is slumping or is comparatively low, it has the potential to give a wrong impression of heightened demand. At the core, trend lines focus on the detection of resistance and support levels, which serve as a couple of basic but significantly noteworthy concepts in the case of technical analysis. Keeping this in view, an uptrend line presents support levels that form a wall below which it is highly unlikely for the price to drop.
Thus, the trend may be deemed invalid when the resistance and support levels are shattered, either to the upside or downside. In several cases, when the respective levels remain unsuccessful in holding an ongoing trend, the market is inclined to change its direction. Even then, technical analysis is considered a subjective field, as everyone may display a completely contrasting method to draw trend lines. Therefore, it may be beneficial to merge several TA techniques along with fundamental analysis while endeavoring to minimize risks.
How to Draw Valid Trend Lines?
Trend line can link 2 points present in a price chart. However, as agreed by notable chartists, to make a trend line valid, there is a requirement to utilize 3 or more points. There are some cases where one can use the initial 2 points to show a trend, while using the 3rd point can facilitate testing its validity. In line with this, when the price reaches the trend line, 3 or more times but doesn’t surpass it, the trend can be categorized as valid.
Scale Settings
Apart from selecting enough points for the creation of a valid trendline, a noteworthy point for consideration is proper settings while drawing them. Among the crucial chart settings, the sales settings play a very important role. When it comes to financial charts, the scale deals with the manner for the display of the price change. The 2 most prevalent scales include semi-logarithmic and arithmetic. When it comes to an arithmetic chart, the expression of the change is even while the price moves vertically down or up. On the other hand, semi-log charts present variation when it comes to percentage.
Conclusion
Even though trend lines are important tools to carry out technical analysis, they are not completely foolproof. The selection of points utilized to form trend lines has substantial impact on the degree of accuracy in representing real trends and market cycles. This makes them slightly subjective in their nature. Therefore, it is crucial to utilize trend lines in collaboration with the rest of indicators and charting tools. In this respect, Ichimoku Clouds, moving averages, RSI, Stochastic RSI, MACD, and Bollinger Bands.
