Trendline is an excellent tool for trading across the financial markets. But at the same time if you cannot use it in the right way, it can even be counterproductive, says an analyst of trading signals. Let us explore some tips about using the tool in the right way.
The Tool Basics
Trendlines – as the name implies – highlights a trend or sideways movement. A trendline is meant to connect a swing low to a swing high covering both the lowest point of the fall or downward movement to the highest point in the movement upward. As and when the price keeps rising the trend line rises in accordance.
An ascending trendline results from connecting these lows with a line and it shows the prices are rising or trending upward.
You can also draw a trendline along the individual swing highs. This shows the following:
- An angle of ascent
- Relative strength of the trend
- The strength of the price move
The swing highs fall along with the fall of the price. A descending trendline showing the downward trend is obtained by connecting these highs with a line. You can also draw a trendline along the swing lows. This reveals both the strength of the downward price movement and the angle of descent.
Analysts of some of the best trading signals say that it is typical to have more than just one trendline in play. You can draw multiple trendlines at any given moment. Then all your trendline show price movement over different time periods.
Trendlines drawn at very steep angles usually have short lifespan. This is because no price can sustain a near-vertical rise or fall much longer.
Drawing trendlines whenever possible help rookie traders spotting the overall trend. Moreover that also highlights small trends as well as making corrections in the overall trend.
Trendlines often require adjustments after being drawn. Prices hardly ever move in a uniform mode in reality. As trendlines account for both time and price, it is very normal for them to keep moving along the time and price axis.
This makes one thing clear and that trendline needs to be adjusted in case of any acceleration or deceleration of the trend. Trendlines are more of a tool and a reliable tool. In order to adjust a trendline or to consider whether it has been broken you should solely consider the way the price moves within the trend.
Typically in an uptrend, the price makes both higher highs and higher lows. As long as this phenomenon keeps repeating itself, the price keeps moving below the trendline. This does not necessarily indicate the trend has ended although you may need to adjust the line a little.
Typically in a downtrend the price makes both lower lows and lower highs. As long as that phenomenon keeps happening and the price keeps moving above the descending trendline, it does not indicate the trend has ended; although you may have to adjust the trendline a little.
Trendlines as your guide
Analysts dealing in live trading signals have something to add to the ongoing context. When you need to adjust a trendline constantly, it is no more useful as a trade signal. If you draw a trnedline at a slightly different angle, it makes a huge difference in the price that particular trendline intersects with.
Now let us sum up the facts. Trendline is a helpful guide but you must make use of more precise criteria to enter into a trade to be in the safer side.
To cut a long story short, if you are using trendlines just as a trading guide, there’s nothing much to worry regarding drawing trendlines along the exact lows and highs. In certain cases drawing trendlines along extreme lows and highs do work. But in cases where that do not work you should better stick to the best fit trendlines.
Remember even if a trendline is not used as a trade signal, still it offers you valuable insights about the trend without the constant need of readjusting it.
Trendlines final words
Trendlines are indeed a reliable tool to provide accurate trading signals. It showcases short-term trends with the overall trend. Do focus on price action and always do consider it whenever you use trendlines. Trendlines have to be readjusted at regular intervals. Rely on best fit trendlines to avoid making constant adjustments.