Are you sure you know how to use trendlines? Here is the common mistake of traders.
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Trendlines are diagonal lines drawn on the chart, which highlight the direction of the market
To track them we need to identify two parameters:
- The Trend.
- The Reversal Points, (Swing).
By connecting the swings with a straight line, a trendline is obtained which is used to identify a trend direction and a possible reversal in correspondence with a subsequent swing.
A trendline is drawn by joining two swing points. The third swing point will be that of a possible bounce on the trendline, to be used for opening the trade.
Important rule
Drawing a trend line that follows the swings is not always a trendline, even though it is in the direction of the trend. Indeed:
If the trend is bullish, the lower swings are connected.
If the trend is bearish, the upper swings are connected.
This is often ignored by traders. The reason is that the direction of the trade must be in the direction of the trend.
For example, if the trend is bullish and we traced the trendline by combining the upper swings we would find ourselves in a position to open a transaction contrary to the current trend. Vice versa for the bearish trend.
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You can find some trading examples in the YouTube video
Important technical notes
- Trend lines are not an exact science! It is rare for the price to perfectly touch a trend line and then reverse. Trend lines should be considered an “area” rather than a precise price point.
- After the bounce the price can test the trendline, then predict a sufficient duration of the trade.
- When drawing a trendline you should never cross the body of the candles.
- When the third contact occurs, before opening the position wait for confirmation of the momentum, i.e. the change of direction, with a different colored candle.
- Do not draw trendlines in an almost horizontal market, in fact the trend must be evident.
- After several swings the trend weakens and experience tells us that after the fifth pullback the reversal is very likely.
