What are trend lines

5 min readApr 24, 2024

The ability to recognize trends is a key skill for successful market trading. In a very volatile landscape in which prices are always fluctuating, the ability to accurately determine the direction of price movement can be crucial.

Trend lines are a powerful analytical tool that allows you to visualize prevailing trends on a chart and identify possible reversal points.

However, using trend lines efficiently demands a strong insight into market movements and experience in interpreting them correctly. They aren’t a «universal formula» for success, but rather act as a «language» in which markets «communicate» with those who are able to understand it.

In this publication we will explore the concept of trend lines, their varieties and features, as well as the importance of timely identification of changing trends.

How do trend lines work?

Trend lines are a visual representation of the dominant orientation of an asset’s value movement on a chart. Trend lines are diagonals that connect certain price layers and assist dealers in determining possible future areas of support and resistance.

In fact, trend lines are regarded as a basic instrument of tech analysis, which are commonly used in the markets of stocks, currencies, futures and crypto assets. The key objective of trend lines is to identify stable trends and timely identification of possible reversal points.

There are 2 basic kinds of trend lines:

Uptrend lines are drawn from a lower level of an asset to a higher one, connecting a chain of rising lows. They visualize a bullish trend and indicate a rising asset price. The steeper the slope of the line, the stronger the bullish momentum.
Downward trend lines are drawn starting from a high level to a lower level, connecting a series of declining highs. They reflect a bearish trend and signal a decrease in price momentum. The steepness of the line slope demonstrates the intensity of bearish pressure.

The key feature of trend lines is their ability to act as dynamic support and resistance levels. When a rising line is touched, the price often pushes upward, using it as a support to continue a rising trend. Similarly, when a declining line is touched, price tends to bounce downward, meeting resistance.

Thus, trend lines allow you to visualize the overall price movement and potential reversal zones.

How to use trend lines?

Line formations are a universal instrument that can be applied to a diverse range of strategies and approaches.

Here are a few key ways to use trendlines effectively:

Trend identification. Line formations allow you to visualize the market’s current trend — bullish or bearish. Rising lines indicate an increasing value of an asset, while falling lines signal a decreasing price.
Finding entry points. Traders frequently utilize touching/bouncing off a trend line as signals to open positions. In an uptrend, a price bounce off the line can be considered as a possible buy entry point. For a declining trend, a bounce from the line can be a signal for a short entry.
Setting targets and stops. Trend lines can help in determining price targets and positions for stop losses. For example, in a rising trend, a logical target might be the next expected resistance level near the trendline.
Identification of reversals. A line breakout is often seen as one of the early indicators of a potential reversal of a trend. A breakout of an increasing trendline may point to a possible change from a bullish trend to a bearish trend.
Filtering out false signals. Although touching a line does not mean that it has been broken, it can serve as a kind of «red flags». Multiple touches without a subsequent breakout reinforce an active trendline.

It is worth noting that trend bars are a subjective tool, and different traders may interpret them in different ways. Therefore, it is recommended to use them in combination with other indicators and analysis methods to improve the credibility of trading signs.

Displaying trend lines and setting the scale

Building linear formations may seem simple at first glance, but to ensure their accuracy and reliability, certain rules must be followed. The key factors are the number of reference points used to draw the line, as well as the correct setting of chart scaling.

Number of points

Although technically a trend line can be drawn through any 2 points on the chart, most seasoned traders advise the use of 3 or more anchor points. This increases the «reliability» of the line and reduces the likelihood of misidentifying the trend due to random price fluctuations. When the price taps the trend line several times without breaking through it, it serves as a confirmation of the validity of the current trend.

Scale setting

Adjusting the chart scale is critical to displaying trend lines correctly. There are two basic scales used on financial graphs: arithmetic and semi-logarithmic.

In an arithmetic chart, price changes are displayed evenly along the vertical Y-axis. For example, a rise from $20 to $40 would have the same scale as a change from $80 to $100.

In contrast, a semi-logarithmic graph shows price changes as a percentage. On such a scale, a 100% increase (from $20 to $40) will take up a significantly larger part of the graph compared to a 25% increase (from $80 to $100).

The choice of scale can have a significant impact on the display of highs and lows, which define the points of building linear formations. Therefore, it is extremely valuable to take the scaling setting into account when analyzing trendlines to avoid erroneous conclusions.

Final thoughts

Trend lines are a strong tool, but their application requires caution and a holistic approach to market analysis. Excessive dependence on one indicator is fraught with errors and losses.

Experienced traders recommend combining trend lines with other methods of technical analysis, such as volume indicators, oscillators, etc.

Also a practical solution is to integrate line formations into the risk management system. It can be utilized to establish stop-losses, trailing stops, target profit withdrawal levels. This will help to timely fix profits and limit losses.