Most of the trading world hadn’t given the right respect to trend lines or applied them too weakly. No wonder then that most aspiring traders miss important market insights. So simple yet so vague, drawing a precise trend line is one of the most difficult tasks for seasoned traders too.
Hence, it would not be surprising if even seasoned traders tend to misrepresent their symbols. A great lack of understanding leads to poor trading decisions, missed opportunities, and, in the end, losses in the markets.
Trend Lines in Trading
Trend lines are simple technical analysis instruments used to project price action and possible levels at which someone might be entering or exiting. The dangerous illusion that one has mastered this basic thing usually sets in when real market conditions confound the trader. One of the most important things one needs to master in perfecting his trading strategy is how to effectively draw and use trend lines.
Here, we are going to explore three secrets that have found their way into trend lines, commonly overlooked by most traders. Through these, you are going to make better trades, gain accuracy, and enable yourself to make mature decisions in the market.
What Are The Secrets Of Line Trends?
Secret #1: Proper Drawing of Trend Lines
Most traders are very confident that they can draw trend lines, but the sad fact is many of them make critical mistakes that eventually lead to misinterpretations. In essence, the core underlying concept of trend lines is to determine if the market goes up in a bull market or down in a bear market.
Drawing Trend Lines in a Bullish Market
A trend line in a bull market should touch at least two low points that differentiate swing lows, and the trend line should be positioned on the underside of these points. Here is how it goes:
- Identify Swing Lows: Find at least two swing low points in an uptrend and then draw the line underneath them to capture the market’s upward swing.
- Qualification: After the price retraces and moves halfway up to the previous swing low, you can confirm that you are in an uptrend.
Trend Lines in a Bearish Market
If the market is bearish, then your trend lines should be drawn along the swing highs:
- Identify Swing Highs: Find two major swing high points in a downtrend.
- Link the Points: Draw the trend line on the top side of these points to further emphasize the fact that market price is plummeting.
- Qualification: Observe that just as in a bullish trend, you’d like to wait for the price to half retrace before you confirm the trend line direction.
How to Correctly Draw Trend Lines
Knowledge of how to draw trend lines correctly is very essential because most technicians draw them incorrectly, making it difficult to interpret the correct direction of the market.
Secret #2: The Importance of Trend Line Interactions
Now that you have correctly drawn the trend lines, the second secret is determining how the price reacts with those lines. Trend lines are active support and resistance levels, and it will depend on market context.
Reaction of the Market at Trend Lines
Whenever the market is near the trend line, study carefully how it will react. Here are your important findings:
- Third Touch Principle: Numerous traders utilize the rule of “third touch,” where the third contact with a trend line usually provides a good trade. The touch can be considered the confirmation signal to enter the trades, going long in a bull market or short in a bearish market.
- False Breakouts: Be careful about false breakouts. The price may penetrate the trend line and then rapidly reverse. Instead of freaking out, you can refine the trend line a little bit to account for these moves and re-analyze your trading strategy.
You can learn valuable insights into how a price reacts with trend lines in relation to strength and reversals.
Secret #3: Trend Lines Have Memory
Another lesser-known secret is that trend lines possess a type of “memory.” The more traders watch and pay attention to them, the more effect they have on the market’s behavior.
Psychological Element
Traders react to trend lines because it is one of the most popular tools used in technical analysis. Collective knowledge creates a self-fulfilling prophecy:
- Increased Focus: The more traders realize that a trend line acts as support or resistance, the more people start acting on that, hence increasing the effectiveness of that trend line.
- Markets in Focus: Trend lines give considerable proportion and clarity to markets. They help buyers recognize potential targets for selling prices and entry points.
But don’t forget, no trend line is a permanent feature. Price action might break the trend line, which may indicate that a trend is reaching its end. This is where your risk management strategy may aid you.
Conclusion
In a nutshell, mastering the art of drawing trend lines may sound simple but is much more complex. What you learn here about proper techniques, the nature of how the price works with the drawing of such trend lines, and its psychological impact on the market’s behavior will make you much better off in trading.
Thus, trend lines are great forecasting tools for market direction, but practice and experience are needed to be put to use. As you continue honing your skills, keep in mind that the simplicity of trend lines may be a disguise to their depth of insight.
During your trading journey, take some time appreciating the details of trend lines. Those look pretty obvious, but when used properly, they can become one of your most valuable trading assets. So remember the top three secrets, and let your trading journey benefit from the clarity and direction provided by trend lines.
