Why Trendlines Are Important In Trading?

Markets often trend. When markets trend prices either make higher highs or lower lows. You can find the direction of the trend in the market by drawing trendlines. A trendline is drawn by connecting two or more points. In case of an uptrend, connect two higher lows and extend that to the right and in case of a downtrend, connect two lower highs and extend that to the right. The slope of the trendline indicates how fast the market is moving.

You can eye ball the chart and draw trendlines visually or you can use a software that can do the job for you. Uptrendline represents the area of support. Support acts like the floor of a room. When you hit it with a ball, it bounces back towards you. In the same manner, when price action hits support, it bounces back. An uptrendline is drawn by connecting two higher lows and extending that to the future. In the same manner, a downtrendline represents an area of resistance. Resistance is just like the ceiling of a room. When you hit it with a ball, it will bounce down towards you. In the same manner, when prices hit resistance, it bounces back as heavy selling starts close to it. A downtrendline is drawn by connecting two lower highs and extending that into the future. But keep this in mind that drawing a trendline is always a subjective matter and may vary from trader to trader or from software to software.

What you need to understand is that trendlines are very important for a trader. They visually depict the support and resistance in the market. Trendlines need to be updated with time as the market keeps on changing it’s direction. Now, what you need to understand is that there are long term trendlines, intermediate term trendlines or medium term trendline and short term trendlines. You will need to constantly update these three trendlines.

Trendlines are helpful in telling in which direction the market is moving. When the angle between the trendline and price action becomes steep, markets make a correction and revert towards the trendline. So every time the market increases its speed and makes a larger and larger angle from the oldest or the longest trendline, it sets itself up for a counter trend rally back towards the older or the longer term trendline. As experienced traders tend to trade larger positions, so it is their buying back of contracts after accelerated sell offs that sets the counter trend process in motion.

These counter trend moves are represented by the short term trendlines. As a trader, you need to respect these trendlines. When you see the angle between the short term trendline and the price action increasing, exit half of your position. Always remember prices tend to revert back to the long term trendline.

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