Trendlines is one of the favorite tools of traders as it allows them to explore market psychology and trade in different ways. One of the main reasons for its popularity is, it is universally applicable across all timeframes, markets and market conditions. But, it takes a lot of practice to draw and analyze trendlines. So let's see how to use them in your trading.
How to use and draw Trendlines in Trading?
Most traders do a big mistake of connecting the first two highs or lows and then get overly excited once then the price gets there again. But it is highly advisable to wait for three confirmed points of contact. A trendline is only confirmed if you can get three points of contact because you can always connect two random points on your chart. But when three points start to line up, it is not a coincidence anymore. Many traders get confused about using candlestick-wicks or candle-bodies. Use confluence. There are no fixed rules on whether to use wicks or bodies. Just look for the trendlines which give you the most satisfaction without being violated too much. To avoid noise, stick to one approach of drawing trendlines.
The next query that pops into a traders' mind is whether you draw trendlines connecting the lows or the highs. The answer is easy, during a downtrend, use the highs and during an uptrend, use the lows to draw a trendline. It has two benefits; you can use the touches to get into trend concerned trades. If you are comfortable with volume and chart patterns, use head and shoulder patterns as it can identify trends quickly. By using Indicators and oscillators also, one can draw and analyze market trends.
There are very few patterns in technical analysis that are based on trendlines. The wedge is a very popular one and we can apply their knowledge here nicely. If you look into a wedge pattern properly, the lower trendline will indicate that the rice is falling. It will show that the seller is not as strong in this market anymore. In the end, before the strong reversal, the market makes one final push which ends as a fake breakout. This pattern is often referred to as a Bull/bear trap.