Identifying a trend line is the very import an integral part of technical analysis. Every trader spends most of his time in finding a perfect trend line as these trend lines not only helps a trader to get benefit from the major trend but it also helps a trader to spot reversals which can result in a huge profits as whenever a long-term trendline decides to give a breakout with supportive volume it tends to give a huge movement which a trader can encash and make huge profits out of the market.
Trend lines not only helps a trader to spot entry points but they also help a trader in identifying and setting profit booking and stop loss level in an existing open position.
Drawing and following the trend lines is the easiest and most effective technical analysis tool almost all the other technical patterns are based on the trend line only, some patterns take the trend line as a support and other focuses on the breakout of the trend lines. Trend lines give a trader a securities primary direction or trend which helps the trader to make an important investment and trading decisions.
In this article, we will explain the different use of trend line and the reliance on trend line in the trading business with a few historical examples. We will explain the basics of trend line and how you can use them in order to make money out of the market by trading support and resistance a trend line break.
The price of financial assets tends to moves in trends which can be upward or downward and Support and resistance which is not drawn in a straight line are named as Trend line. The trend line is nothing but support and resistance lines which is drawn in an angle on the chart and it also reflects the level where the market is expected to react based on the past price points where the market had reacted.
This is also a very important tool used by a majority of analysts to find the dominating power in the market as we all know the basic and most important rule of trading which is “find the trend and fallow it”. After the identification of a major trend, an investor should always open a position which is in line with the major trend until and unless there is a clear indication of a trend reversal in the market. As going against the flow is never a good idea.
In chart 3 we can clearly see an active downtrend and a strong downtrend line as whenever the price reach near to this trendline it moves back to bearish territory and make deeper lows. This trend line is well supported by five touches we can see in the red circles which explain its importance in the market.
In this type of market, traders should always open a short position when market reach near to the trend line and keep the stop loss level above the trendline. However, if the market shows bullish signals and a sign of a reversal in the trend then a long position can be opened above the trend line after the breakout supported by candlestick patterns.
Chart 4 is the extension of chart 3 where we can clearly see that after testing the trendline at the fifth red circle the price of the asset dropped back down aggressively by respecting the down trendline. In this case, those traders who had opened a short position near the trendline had made money in this trade as the price remained below the trendline and reached the target. This example explains how a trader can read and use trendline in trading and make a profit out of the market by understanding the trend and following it.
Trend line Breakout:
In the previous examples, we had learned how to trade with the trendline and make decent profits out of it bout, on the other hand, a trendline not only serves as a guiding line but also it shows the weak points where the price of a financial asset can turn. In other words the breakout of the trendline can result in a big opposite movement in the price of the financial asset which is a great opportunity for a trader to make money out of the market as this reversal tends to give a strong and quick movement in the opposite direction which can help a trader to make money out of the market quickly and easily.
We can clearly see a breakout of the trendline in chart 4 where the price of the asset which is a currency pair, in this case, crossed the long-term trendline which resulted in a strong bullish movement in the pair. This breakout is a very prominent area where bulls can start accumulating the asset and push the price further up as it shows that the selling momentum is now fading which gives bulls a chance to jump back on the driver seat and push the price further up in bullish territory.
In this case, those traders who had opened a long position after the break of the trendline had made money. In this trade as the price remained above the trendline and reached the target. This example explains how a trader can read and use trendline in trading and make the profit out of the market by trading the trendline breakout strategy.
THE BOTTOM LINE
Trendlines are a very versatile tool of technical analysis where a trader can use the trendline as a scale to measure the strength and direction of a financial asset in every market conditions. A price that drops below the bullish trendline or goes above the bearish trendline is often used by traders as a signal of a potential reversal in the current trend. This price movement gives a trader a signal to enter in the market based on the trendline break strategy which offers a great strategic entry price to a trader.
On the other hand following a trendline and opening a trade with the trend is also a very good and highly profitable trading strategy where a trader uses a trendline as a border or a channel which gives him an entry and exit point to trade safely in the financial asset this way both the trendline break and following trendline strategies works well if identified correctly and they have a huge potential to make money for the traders.