How to Draw Trend Lines and Channels on Charts
Sometimes support & resistances are formed diagonally in a similar way like a staircase. This forms a trend which is a sustained movement in one direction either upwards or downwards.
A trendline depicts the points of support and resistance for the price, based on the direction of market. For an upward moving market trend - trend line will shows the points of support and for a downward moving market trend - trend line will show the areas of resistance - trendlines are mainly used by many traders to determine these resistance and support levels on charts.
A Trend line is a slanting straight line that connects two or more price points and extends into the future to act as a zone of support or resistance for the price movement. There are two different types of trend lines: upward trend line and downward trend line. trendline is an aspect of analysis that uses line studies to try & predict where the next price move will head to. A trader must know how to draw and interpret signals generated by this trend line tool.
The basis of this analysis is based upon the idea that markets move in trends. trendlines are used to show three things.
- The general direction of market - up or down.
- The strength of the current trend - and
- Where future support and resistance will be likely located
If trend lines forms in a certain direction then the market usually moves in that direction for a period of time until a time when this trend line is broken.
Drawing these trend lines on a chart displays the general trend of the market which can either be up-wards or downwards.
Below is example of how to draw these trend lines on charts
Course: How to Draw Up-wards Trend Line & Trade Upwards Trend Move
Course: How to Draw Downwards Trend Line and Trade Downward Trend Move
The MetaTrader 4 software provides charting tools for drawing these trend lines on charts. To draw trendlines onto a chart, traders can use the tools provided in MetaTrader 4 software that is displayed below.
To draw trend lines on a chart just click the MT4 Draw Trend Line Tools as shown above on the MT4 platform technical analysis software and select point A where you want to start drawing the trendline & then point B where you want the trendline to touch. You can also right click in the trend line and on the properties option select the option to extend its ray by ticking the "ray check box", if you do not want to extend the trend line, then untick this option in your MetaTrader 4 software. You also can change other trendline properties such as color and width on this property pop up window of the trendline properties. You can download MT4 software and learn trendline technical analysis with it.
The trend is your best friend. Is a popular saying among investors because you never should go against it. This is the most reliable strategy to trade because once prices start to head in one particular direction they can move in that particular direction for sometime - therefore using this market trend strategy presents an opportunity to make trading profits from the market.
Guidelines of How Do I Draw Trend Lines
Use candle-stick charts
- The areas used to draw the trendline are along the lows of the price bars in a upwards market. An upwards bullish trend move is defined by higher highs and higher lows.
- The points used to draw the trendline are along the highs of the price bars in a falling downward market. A downwards bearish trend move is defined by lower highs and lower lows.
- The points used to draw trend lines are extremes points - the high or the low price. These extremes are critical because a close beyond the extreme tells investors the trend may be changing. This is an entry or an exit signal.
- The more often a trendline is hit but it's not broken, the more powerful its signal.
There are two main ways of trading this trend line technical analysis set-up:
- The Trendline Bounce - Trend Line Bounce
- The Trend Line Break - Trend Line Break
Technical Analysis Methods of Trend Lines
The trendline bounce is a continuation signal where price bounces off this trend line to continue moving in the same direction. In a downward trend, the market will bounce downward after hitting this trend line level which is the resistance level. In an upward trend, the market will bounce up-wards after hitting this trend line level which is the support level.
The trendline break is a reversal signal where the market goes through the trendline & starts moving in the opposite direction. When a upward trend is breached then sentiment of market reverses and becomes bearish & when a down trend is broken then the market sentiment reverses and becomes bullish.
For very strong trends, after this trend line break signal, the price will consolidate for some time before moving in the opposite direction. For short term trends then this trend line break signal will mean price may reverse direction immediately.
In trading, both the trend line bounce & the trend line break that are used in analysis charts are based upon these trend line levels being support & resistance areas.
Entry, Exit and Setting stops:
This trend line method is used to determine good entry and exit points, protective stops are placed just above or below these trend lines. The trend line bounce is a low-risk entry technique used by traders to place entry trades after price has retraced. trades are setup along these trend line levels and a stop loss placed just above or below these trend lines.
The trendline break is a crucial indicator of possible trend reversal. When the trend line is broken the price starts to head in opposite trend direction. This provides an early exit signal for traders to get out of their open trades and take profits. When there a penetration of these trend line levels, it is a signal that the price can start moving in the opposite direction.
Unlike other trading analysis indicators there is no formula used to calculate the trend line, this trend line formation is just plotted between two chart points on the chart.
