Learn about Trendlines
Trendlines are one of those areas of Technical Analysis, as referred to in my Guide to Trading, that can be a bit subjective. A trend line requires at least two touch points for it to be considered valid – you can’t draw one without at least two – and the more there are over a longer period, the more valid the trend can be considered to be.
Price tends to bounce off trendlines, whether they go up or down, and as such can allow us to guess what price will do as it approaches a trend line. However, what should really bake your noodle, is this; would price still bounce off the trend line if we didn’t see them? Does crowd behaviour create the trend, traders sees the trendlines form – and then base their trading decisions around them, validating them – or would price behave that way anyway?
Take a look at this chart below, which is again of GBP/USD on a daily chart, going back just over a year from June 2017 to August 2018.
The start of a uptrend, three touches on this trend line in Oct, Nov and Dec 2017, before price rockets north through what has been resistance around 1.36000 in late Dec 2017.
Two touches here, creating a large ascending triangle pattern, between lines A and B. After price initially breaks through the top of the triangle near where lines A and B intersect (the green price action around the turn of 2017/2018), it falls back down, touches trend line B in January 2018 and then goes north. Did it bounce off that price or did we make it bounce off that price with our crowd behaviour?
Not so much a trend line, more of a double top price pattern, where price attempts to go higher twice, fails, and then rapidly falls away. Was this due to lots of traders seeing a double top and trading it like that, or was there some economic event that triggered the price action?
Formed of two up touch points, and then invalidated as price drops through it with barely a whisper of acknowledgement.
The start of a downtrend four months in the making? If trendlines are to be believed then at the time of writing when price is below 1.30, it would need to now rise above 1.32, where the extended trend line is currently at, for the downtrend to break.
So, some trendlines work and some don’t.
Most trendlines can be made to fit in hindsight – at least in my view. What’s more important is not necessarily the trend line , but how it might tie in with Support and Resistance levels around those trendlines. If there is corresponding S&R and a trend line, then I’d probably consider that to be quite reliable.