Trendlines are part of technical analysis to help traders make a decision on whether to buy or sell an asset. Trendlines are similar to support and resistance lines, they function as levels where price continuation or reversal can occur. The difference is that trendlines are diagonal lines whereas support and resistance are horizontal lines.
You can form a trendline by connecting two price points. A trendline is used for trend identification so that a trader can buy an asset if the trend is going up or sell an asset if the trend is going down.
Two price points are required for identifying a trendline, while three price points are required for validating a trendline. If the third price point validates the trend line based on the previous two points, then the trendline is a strong tool for making decisions when the prices comes near it.
Here are some notes regarding trendline formation:
- The more points a trendline has, the more valid it is
- The distance between the price points should not be too close together since it can create an invalid trendline
- The angle of the trendline should not be too steep since the steeper it is, the less likely it will act as a valid support or resistance level
An uptrend line occurs when two low price points connect. This trendline becomes a diagonal support level during bullish trends. As long as the price remains above the uptrend line, then the market is still bullish. However, if the price breaks below the uptrend line, then it can signal a reversal into a bearish trend.
A downtrend line occurs when two high price points connect. This trendline becomes a diagonal resistance level during bearish trends. Similar to uptrend lines, the market is bearish as long as the price remains below the downtrend line. If the price breaks above the uptrend line, then the market may turn bullish.
An example of a recent trendline is on BTC/USD line chart on BigoMex.
There is an uptrend line that becomes a valid support betwen 10:00–15:00 on 26 July 2021 where the price moves from around $38.000 to $38.600.
The price touches twice on two points that are not too close although there are several other points touching the price but they are too close to each other.
Using this line can result in profit if a trader buys Bitcoin when the price touches the uptrend line as as a support level.
However, this uptrend line finally broke down near 15:00. The break of the support level can become a place to open a short position, where Bitcoin went from $38.600 to the previous horizontal support level at $38.000.
Although trendlines can be used as technical analysis tools, some traders think that horizontal support and resistance lines are more reliable than diagonal trendlines. Combine both of these technical analysis tools to form a solid basis for your trading.