Why trendlines?
One thing I’ve found through my past years as a trader and market analyst is the importance of using a trendline. These simple tools can really help make or break your trading, and often signal a larger move to come. I’ve met traders who ONLY use trendlines, and they have made massive profits just from this simple tool. For me it is a critical part of my trading process, so let’s cover how to use them.
What is a trendline?
A trendline is as simple as it sounds, just a line. This line placement can be important however, it usually goes along with a trend in the market, drawn across price highs or lows. A market trend is made of higher highs, and higher lows, and these trend-lines hope to track those as pictured below.
Nasdaq trendlines.
Characteristics of trendlines:
As per Kirkpatrick and Dahlquist in “
- Length of time the line is held
- A line that is held for a longer time period has more significance than one that is short.
- Number of tests
- A line with more price tests along it has more significance than one with only two tests, the minimum.
- Slope of the line.
- A line that is very steep is less significant than a line that is relatively flat or one that has a medium slope.
This chart here shows an excellent example:
Trendlines in Gold.
Trendline flexibility
Trendlines are relatively flexible, and tests and pivots don’t always have to line up. In this example the trend line only fits moderately well:
The trendline doesn’t fit well but is still usable
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