How to use trend lines in trading

How to use trend lines in trading

Trend lines are a type of trend analysis that helps traders better understand the current structure of a trend as well as when it might change and how fast this might occur.

 

Trend lines are made up of at least 2 swing points (Figure 1) on any chart. They could feature 3+ points but at least two are needed to build a trend line. You can see in Figure 1 how two points were used to form a trend line.

 

Figure 1

 

Trend lines can be used to show patterns such as flags, wedges and pennants as well as triangles. Such patterns can provide trading opportunities and some traders choose to solely focus on finding them and trading those high probability setups. They can also be used to maintain a certain view. For example, as long as price stays above a rising trend line, the trend is considered as bullish.

 

Trends will eventually come to an end and as long as a trend line is containing the price then the trend is intact. In the example below (Figure 2), you can see how the trend was down and eventually, price broke above the trend line and continued higher. This indicated the end of the current trend and while this might not affect the overall direction, this shift shows that new market players are in control and looking towards the other side.