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Trendlines, how to spot them and which attitude to adopt?

Written by Gabriel Yeh

Last article analyzed the characaterizaion of trendlines. Today’s article will further discuss the continuation and reversal of trend in trendlines.

The underlying theory of trendlines is that, after a trend kept developing in a certain direction, once the trendline breaks the market will enter into either a reversal or consolidation.

How to look at a trendline?

The chart above shows a short-term uptrend. A trendline tool can be employed to help us see if the trend will continue or not.

How to characterize an uptrend line?

Like in the chart above, when troughs move higher and higher, connect at least two lows, such as 1 and 2, to get a visual representation of the trendline.

When the price starts to retrace, the candlesticks will touch the trendline. At this time,signs of rebound need to be closely monitored on the trendline. If the price rises again, the trend is very likely to continue, which should be seen as a signal of entry.

As can be observed, if the price successfully bounces back from the trendline, entry should be done once the price rises above previous highs and the stop loss set at previous lows. If the price breaks below the uptrend line, the position should be closed to ensure profit.

How to characterize a downtrend line?

As shown in the chart above, when highs move lower and lower, connect at least two highs to get a visual representation of the trendline.

As the chart above shows, after the price bounces back, the candlestick will touch the trendline and reverse back to a downtrend . Once the price falls below support, a short position entry is recommended with a stop loss set at the previous high.

This was a short definition and trading tips for both uptrend and downtrend lines.

Three scenarios in wake of a trendline break

In the first example, After a trendline break it is highly likely that the price will enter a consolidation; in this scenario no position is recommended.

In the second example,a sharp rise is visible as the price shoots up above the trendline. As this scenario is very sudden, and volatile, the timing of entry can be very challenging. Therefore, it is advisable to wait for a slowdown of the market before taking positions.

The last example is the easiest to define, the price breaks the trendline and makes a reversal. As the chart above shows, the price retests the cross of the downtrend and uptrend lines after breaking through the downtrend line.

This was a brief introduction to trendlines and how to characterize them. Please leave a message in the comments if you have any question. Thank you for reading.

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