How to draw trend lines

1. What is a trend line?
   A trend line is a straight line that reflects the direction and strength of a moving trend. The trend line does not actually exist but is depicted by traders to help them observe market movement intuitively and conveniently.
   The trend line is drawn to depict the path and trajectory of trend movement. Sourced from Dow Theory’s definition of bull and bear markets, the trend line is a theory that is developed based on multiple market analysis concepts, including the Dow Theory, three major assumptions in technical analysis, and Wave Theory.
   According to the moving direction of the line, the trend line can be divided into an upward trend line and a downward trend line. As shown below:
   

2. How to draw a trend line

• Upward trend line
  The upward trend line is the straight line formed by connecting two troughs of the price wave during a certain trading cycle. The line should not be broken in any manner. As shown below:

• Downward trend line
  The downward trend line refers to a straight line that is formed by connecting two peaks that the price hits during a certain period of the trading cycle. The line should not be crossed in any manner. As shown below:

Application

1. The concept of the trend line is based on Dow Theory, three major assumptions of Technical Analysis Theory, and Wave Theory. According to Dow Theory, a bull market refers to the situation when the price spirals up, it can always hit a new height in every round of rise, and even if it falls, every drop it makes would finish at a point that is higher than the last drop. A bear market refers to a downward trend where the price always goes lower every time it rebounds, but can always hit a new low in every new round of decline. Thus, when the price spirals up, we can draw an upward trend line by connecting every trough it hits. A downward trendline can be formed by linking every peak of the price wave that moves down.

2. Traders can use the trend line as a pointer to read the direction and strength of the moving trend. The theory of trend lines is an abstract summary of Dow Theory’s trend operation and can be of great help in market trend analysis. The three major assumptions of technical analysis theory are: (1) market behaviors (currency price or index) accommodate and digest all information; (2) the market evolves in the trajectory of a certain trend, and the trend generates its own inertia; (3) history will repeat itself..

3. The angle of the trend line reflects the strength of the moving trend. Generally, if the upward trend line slopes at a gentle angle, it means the price rises at a gentle tempo, and the line will not be crossed easily. In contrast, an upward trend line that slopes at a steep angle often indicates the rising trend gains strong momentum, and it is more likely for it to be crossed. The downtrend line can be interpreted in the same manner but in the opposite direction.

4. The trend line with a gentler slope indicates stronger stability, and a trend reversal is more likely to occur when it is crossed. Even if the price can resume the original trend after the line is broken, it is not easy for it to set a new high or new low thereafter. In contrast, the trend line that slopes sharply is easy to be crossed, but generally, the crossing is merely a relay of the rising or falling waves and does not signify the reversal of the current trend. In most cases, the price will resume the previous course shortly and continue to make new highs or new lows

Crossing the trend line

“Crossing of the trend line” refers to the price moving to pierce the trend line, with the price difference exceeding 3%. The detailed process is as follows:

1. The currency price that has been moving along the trend line changes the direction to break through the trend line either upwards or downwards.

2. The price diverts from the trend line in a range exceeding 3%.

3. When the downward trend line is broken by a rising price, it does not necessarily signify an upward trend. You would need to check the trading volume to confirm. However, no other justifications are required to confirm a downward trend that starts with an upward trend line being crossed by a declining price.

4. After the trend line is crossed, the faster and the farther the price moves away from the trend line, the more reliable the signal is for the trend reversal.

Technical meaning of trend line crossing

1. When the price rises and crosses the downward trend line, it signals a reversal of the price movement and trend;

   1. Special reminder: The crossing of the downward trend line is not a signal to start buying assets. Traders need to consider technical forms, moving averages or other technical analysis methods to determine whether it is a good time to buy more.
   2. It is important to check the trading volume and period range of the downtrend line to determine whether the trend is reversing when the downtrend line is crossed. Generally speaking, the trend reversal is more likely to occur when there is an increase in trading volume and the broken downward trend line covers a longer period of time.
      

2. When the currency price declines to break through the upward trend line, it is a signal of price peaking, and it is time to sell assets;

   1. When the upward trend line is broken, it means that it is time for traders of the same period to liquidate their positions, and for traders of a longer period to reduce their positions. If there are two or more trend lines within the same trading cycle, liquidate your positions when any of them is crossed.
   2. The trend line that slopes steeper is easier to be broken, and indicates a trend that would last for a relatively shorter period of time. Therefore, it is a more sensitive tool to reflect the market change. On the contrary, the trend line that slopes gently signifies a stable trend that can last for a long period of time, so it is less useful in predicting market changes in trading.

Summary

The trend line is useful in determining the direction of the trend, judging the time of entry and exit, and finding the endpoint of the rising or falling trend in actual trading. Particularly, traders who are vested in the logic of the trend line will significantly increase their success rate in futures trading. We suggest all traders to learn the principles of trend lines, grow an understanding of the tool by using it in actual trading and gradually develop their own trading mindset that centres around the trend line.

Register on the Gate.io contract platform to start trading!

Disclaimer

Please note that this article is for informational purposes only and does not offer investment advice. Gate.io cannot be held responsible for any investment decisions made. The information related to technical analysis, market judgment, trading skills, and traders’ sharing should not be relied upon for investment purposes. Investing carries potential risks and uncertainties, and this article does not guarantee returns on any investment.