Many traders may agree, using trendlines is like trying to paint a Picasso. We’ve all seen the trading guru’s chart with them drawn in, they seem so clear, so ridiculously crystal clear about what to do next its almost painful. Why then do I and so many others struggle to use them? In the next few paragraphs, I hope to simplify trendlines and shed more light on their use.
The first thing I should say is, and this is strictly my belief, most traders draw them on a chart in hindsight, then they post charts online for the world to see their brilliant technical analysis. That’s part of the problem but I’ll avoid dwelling on it because it isn’t really helpful for a solution.
Deciphering Egyptian Hieroglyphics aka Trendlines
Now, with that side note out there I’ll focus my attention on how I use trendlines and more specifically how I benefit from the use of them in my trading. For any interested, this is an insightful look at how to properly draw trendlines on a chart.
Trendlines are formed with at least 2 points of contact. Validity is achieved with at least 3 points of contact. In truth, I find that 2 is perfectly acceptable for shorter term traders to use. For longer term investors, 3 should be the minimum.
Take a look now at the image located above. Rather than do what I honestly believe most do and post a picture in the past with perfectly drawn trendlines I’ve drawn them into a current chart to determine their meaning together. Once discussed, I’ll offer a prediction as to what I believe price will do next.
The first thing to note is the longer term (light blue) solid trendline (drawn on weekly chart). The image above is of the daily chart and the shorter term dark blue dashed trendlines highlight the short term trend. Either set of lines indicates the trend is currently up.
Interpreting the Trends
The information can be translated a few ways. Lets consider each:
- Price could break through to the upside. Respect the shorter term trendline and violate the upper long term trendline.
- The price could turn lower. Respect the longer and shorter term upper trendline but violate the lower short term line.
- Price could stall, trade sideways and respect each trendline. At least temporarily.
That’s really the only 3 scenarios that could happen.
The problem is, that information isn’t even slightly helpful. We could’ve figured that out without drawing the lines. However, what the trendlines have done is forced us to develop a storyline. Let me explain:
- If the price breaks through to the upside, this should be viewed as significantly bullish, especially with no prior resistance.
- Should price honor the upper long and short term lines, this is viewed as at least mildly bearish. If that mildly bearish sentiment gains some momentum, in the form of volume and volatility, it is then viewed as significantly bearish.
- Price could consolidate near current levels and force us to wait for an indication.
With that knowledge, trendlines have helped us write a story. Whether that story is true has yet to be determined, but at minimum we have a few plans from which we can approach the days ahead
As of this writing(7/29/19), I believe price will move lower. I’ll have to wait to see what price does but I feel fairly confident price is going to move back toward the 30 EMA line(blue MA line). If volume is significant with that move lower, I believe we may be looking at a swing low in the near future. Only time will tell but there it is for those interested.
If you have any questions about using trendlines or want to add something for the group don’t hesitate to leave it in the comments below.