Everybody wants to know how to draw a trend line properly because it’s the first step towards successful technical analysis. Learning this technique is relatively easy, but can be quite tedious for some so I am going to explain it in detail with several examples.
Let’s assume that you want to analyze Bitcoin prices using your prefered method of technical analysis (I use Ichimoku Cloud, but I will explain how to draw trend lines with any method). The first step is to open the price chart.
How to Draw trend line in Candlestick chart
For this article I chose BTC-E 1 day candlestick chart (see below) because it’s simple enough for beginners and you can apply the rules that I’m going to show you later on all candlestick charts, regardless of their size.
As you can see in the BTC-E chart above, I have partially drawn a trend line .
It starts from the beginning of May when prices began to climb and it ends around the beginning of June (red circle). The main reason why I drew this particular trend line was because it was a previous swing low that was breached decisively . So what will you need to learn in order to draw a trend line properly?
First of all, let’s discuss some basics. Trend lines have to be drawn on the bottom of the price action because they represent possible support levels and it is called support for a reason: prices tend to bounce from such levels.
How to Draw Trend Lines PDF
Furthermore, such levels should be breached clearly (with a majority of traders accepting that price has reached a new low or high), otherwise the trend line is invalidated and you will have to draw it again.
Let’s start with the simplest method for drawing trend lines on your chart:
1) A close below previous trend line support – this one is obvious, but very effective. If prices drop below a former swing low there is nothing else you need to draw in order to show that bears are now in control .
How to Draw trend lines for Intraday PDF
It means that FOREX traders are bearish at this moment so they are shorting at lower prices than before which are causing an accelerated downtrend. You can see this rule being applied in the BTC-E chart above. The first trend line on the left was breached on 5/27 and it caused a downtrend that lasted for more than two weeks.
2) A close below support AND previous reaction low – this one is very tricky, but I use it quite often because I want to make sure that prices are not falling out of nowhere . If you take a look at the BTC-E chart above, you can see that there was some sort of consolidation after May 27th swing low (marked with an arrow). This means that bears are exhausted for now and bulls may be back soon which is why I decided to place another trend line using this rule. Additionally, if price breaks below support AND through previous resistance level it.