One of the most important skills in trading is trend identification. Using straight lines to depict this trend is essentially what a trendline is. The purpose of this guide is to cut through the fluff and teach you how to use trendlines properly in under 2 minutes. Let’s get started…
● Draw trendlines using the charting toolbar on the BTSE trading platform
● Connect as many highs / lows as possible using a straight line
● The more times a trendline is touched, the stronger its support / resistance
● Drawing lines on a chart is highly subjective and far from an exact science
● Trendlines are best used to identify optimal risk/reward entry points
How to Draw Trendlines
Step 1: Find a chart on the BTSE platform:
Step 2: Select the trendline tool in the chart’s sidebar
Step 3: Click and drag the cursor to draw your desired trendline:
Key points to remember:
● Draw trendlines that connect as many highs or lows as possible.
● The more highs or low touching the trendline the stronger it is.
● Less is more... Aim for one strong trendline, not 10 weak ones.
Trendline Support & Resistance
Trendlines are often used by traders to indicate points of support and resistance. Here are the basics:
● Support is a point where traders expect increased buying.
● Resistance is a point where traders expect increased selling.
● A trendline that connects highs can represent a level of resistance.
● A trendline that connects lows can represent a level of support
● When a trendline is breached, resistance switches to support and vice versa
Limitations and Subjective Biases
Many traders make the costly mistake of thinking that technical analysis is an exact science. This can cause over confidence and irresponsible position sizing.
The truth is, trendlines are simply linear depictions of trend direction. Sometimes they represent support and resistance levels, other times they don’t.
Like a lot of technical indicators, traders often draw and interpret trendlines to fit their directional biases.
Recognising one’s own bias is a key element to using these tools effectively and gaining a trading edge.
How to Trade Using Trendlines
There are many ways to trade using trendlines:
● Buying on a pullback to trendline support anticipating bullish trend continuation.
● Shorting at trendline resistance anticipating bearish trend continuation
● Buying on a breakout above a trendline anticipating bullish reversal
● Shorting on a breakdown below a trendline anticipating bearing reversal
● Using trendlines to optimize stop losses and exits
With the benefit of 20/20 hindsight, let’s look at how to use a simple trendline to construct a short position:
Step 1: Enter short at $70 when price touches the upper band of an existing downward sloping trendline.
Step 2: Place a stop loss at $75.37 equal to ~1ATR above trendline resistance.
Step 3: Exit short (cover) when price breaks above the downward sloping trendline.
For more information about using ATR, you can keep an eye out for my next article titled: Using Average True Range (ATR) for Stop Losses and Position Sizing.
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