Trend lines are one of the most commonly used tools of technical analysis. As the name suggests, they follow the trend. Therefore, trend lines can be ascending, descending or sideways.

At least two bottoms or two tops are needed to construct a trend line. When prices are rising, a line is constructed through the bottoms to act as support. In downtrends, a resistance line is constructed through the tops. When the price direction is sideways, the trend lines are horizontal.

Chart 1: Trend Lines. Chart: MetaTrader4

Chart 1: Trend Lines. Chart: MetaTrader4

In the chart example, the uptrend line was broken relatively quickly. However, the downtrend line has repeatedly acted as resistance. In this sense, it has demonstrated resilience. Accordingly, it will be exploited with confidence from sellers. 

Chart 2: Horizontal Trend Line Support. Chart: MetaTrader4

Chart 2: Horizontal Trend Line Support. Chart: MetaTrader4

Chart 2 demonstrates how buyers have dominated at certain price levels, which resulted in the formation of a support zone. This is often how sideways trend lines are analyzed – as a zone (e.g., prices from 100.75 to 101.20) rather than as one specific price value (e.g., 101.20). This approach would filter out some false breakouts to the downside, known as “bear traps”.

Sideways trend lines offer good trading opportunities. With relatively small stops (below the lowest low in the example) positions of great potential can be found. This is especially true in situations like the one above, where trades will be made in the direction of the main trend.

One of the biggest challenges for technical analysts is the selection of points through which to construct the trend line. The general rule of thumb is that the longer a low or high has not been broken, the more reliable the trend line built through it will be. Accordingly, a possible break of this line would be a serious signal for a change in trend direction.

Chart 3: Trendline Support. Chart: Investing.com

Chart 3: Trendline Support. Chart: Investing.com

The solid red line on the chart covers the uptrend in the S&P 500 Index that began at the end of the Global Financial Crisis and lasted for over a decade. The support has held back the corrective declines several times. In each of these, a key low was formed – a bottom for the preceding and subsequent months or years. Support lines built through so important bottoms should be very strong.

These lows are suitable reference points for developing alternative scenarios. In effect, they are the start of a new, shorter-term trend, within the main one. The dotted lines demonstrate this idea. Several alternative trend lines, which form different levels of support, originate from the 2016 bottom. Of course, the most significant support will be offered by the main trend line, which has been built for years through key bottoms. But shorter-term traders would search for shorter-term opportunities and that alternative trendlines could provide one.

Traders feel comfortable when they make their trading decisions in the direction of the main trend. An intraday trader could start his analysis from the multi-year chart and reach to the hourly, maybe even the minute chart. When the yearly, monthly, weekly and daily trends are in sync, trades will be made with a higher degree of confidence.

Many traders view trend lines as an indicator of the slope or strength of a trend. As long as the prices move at an acceptable deviation from the line (below or above it), the trend is valid. The chart below demonstrates how the actual break of the main support line does not actually mean the end of the rise.

Chart 4: Alternative Trend Lines. Chart: MetaTrader4

Chart 4: Alternative Trend Lines. Chart: MetaTrader4

The above examples describe the most basic ways to construct and interpret trend lines – such as supports and resistances. In the next chapter, we will talk about price channels – another important concept which is based on trend lines.

Next: Price Channels

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