If you are a beginner into trading, you have probably heard that earning money through trading was easy as pie. However, unlike a salary, there is no guaranteed income through trading.
If you gamble your money away through trading without understanding the technical analysis, you will start losing money soon. Fundamental analysis will only take you so far.
Many new traders have fallen victim to the uncalculated method of trading. Since they do not understand the market’s flow and movement, new traders do not know when to invest or exit, thus losing money.
However, with careful and calculated investments through technical analysis and algorithmic trading, it is possible to avert the danger or minimize the risk.
The easiest and the most popular technical analysis method is through the chart via the drawing of trend lines.
What Are Trends?
A trend is a pattern that starts showing up over time. In the financial markets, there are generally two types of trends: uptrend and downtrend.
When prices are rising, and the buying pressure is larger than the selling pressure, we can say that the market is in the uptrend.
The downtrend is just the opposite scenario where prices fall, and selling pressure is more than the buying pressure.
When you study the chart, especially a candlestick chart, you can find that various bars show trades over some time. However, you need a strong indicator to understand market momentum, such as trend lines.
What Are Trend Lines?
Trend lines are diagonal or horizontal lines that help understand the linear price movement on a trend and predict the market. Among these, we can divide the horizontal lines into support and resistance lines.
The diagonal lines are formed through the uptrend and downtrend of the price movement of the market.
However, before understanding the diagonal trend lines, let us first examine the support and resistance lines in the financial market.
Support Line
A support line is an imaginary line that represents the point beyond which the fall of the market is mostly prevented due to an influx of buyers. As the name says, it supports the trend of the market from falling any further.
Resistance Line
A resistance line is a line beyond which the market’s rise is prevented mostly because of high selling pressure. As the name suggests, it prevents the market from rising further by offering resistance to the uptrend.
Diagonal Trend Lines
The diagonal trend lines help analyze the recent uptrend and downtrend and find a slope that can provide support or resistance.
If the trend is positive, you assess and connect the lows to achieve a trend line that supports the trend. Similarly, you can assess the highs for a downtrend and connect the points to form a resistance for the trend.
Many people use a Stock market api free to reap extra benefits with minimal effort to make things easier.
Drawing the horizontal trend lines is easy from historical data since it is the zone of Highs and Lows.
However, let us move on to the diagonal trend lines, which are trickier and provide a better understanding of the entire situation.
How To Draw A Trend Line
While drawing a trend line, you want to create a slope where you can find support or resistance for immediate trend and a point of inflection. Beyond this point, there will be a sharp rise or fall once the line is tested.
To do this, follow these steps.
- Look at the chart and see if the pattern is an uptrend or a downtrend.
- If it is an uptrend, you can find the support by joining the lows, and for a downtrend, you can find the resistance by joining the Highs in the trade.
- Try to use more points in the trade, whether it is just the wick or the body of your candle chart, to create the trend line. It will help to reassess the line as a strong indicator.
- Additionally, you can also create a parallel line for your resistance if you have found the support or decipher the support if you find the resistance for the current trend.
- Hit as many points as you can to provide a valid indication of the lower trend line for a downtrend or a higher trend line for an uptrend. It will be the trend area to look out for during disruptions from the line.
- You can also create a small zone, whether in an uptrend or a downtrend line, to minimize a trade risk.
- It is a parallel line that runs near the trend line, above the resistance you have created, or below your support line for the current trend.
How To Use Trend Lines
Trend Lines are universal lines for financial trade technical analysis in any format. You can trade equities, commodities, derivatives, forex, debt, or bonds; the use of trend lines in trade are limitless.
So, let us find how you can use trade lines as a beginner.
Breakout And Breakdown
A breakout means when an uptrend breaks past the resistance line for a trend pattern. Meanwhile, a breakdown is when the downtrend falls below the support line for the trend.
When the trend tries to overcome the trend line, it will face some obstruction.
It is at this point when sellers become more aggressive for an uptrend to book profits, and buyers become more aggressive to pick up the trade at a considerably lower price.
Trend Validation
Investors try to test the market at the breakdown or breakout stage and find out if it can rise or fall beyond the resistance and support line, respectively.
Wait for a confirmation of the rise in the market from the next few candle bodies and wicks. It will minimize your chances of losing money and promote safe buying.
Stop-Loss And Target
A stop-loss is a way to prevent your losses by executing a trade sell-off before it hits a specific zone.
A target is a means of executing a sell-off at the upper end of the trade since you believe that the stock has lost its steam and could fall soon.
With a proper stop-loss and target, the trading will no longer feel like a gamble with unknown variables.
The Trend Line Slope Reveals The Market
A steep trend line slope that becomes parabolic can signal a trend reversal as more traders look to book profits or minimize losses.
The ideal trend line is between 30 degrees to 45 degrees; anything more than that signals a parabolic trend, and a market reversal could happen anytime. A lower trend means the stock has no momentum.
Conclusion
As a beginner, trading is challenging since you do not know the technical analysis rules and formulae. However, using trend lines will provide a visual representation making it easier to trade.
