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One of the most efficient tools to follow a trend are trend lines.

Trend lines are lines that connect consecutive higher lows in an uptrend and consecutive

lower highs in a downtrend.

A trend line is most helpful when looking for entries in the direction of the trend

on pullbacks and in the opposite direction after the trend line is broken.

While they’re relatively easy to apply on a chart, there are some trend line misconceptions

and mistakes made by traders in their analysis.

That’s why in today’s video I will share 10 important trendline rules that all trend-followers

need to know about.

1.

Ignore the candle wicks Trend lines are only useful if placed correctly.

Otherwise, you could find yourself missing opportunities or worse, trading on the wrong

side of a market.

With that said, drawing diagonal levels isn’t an exact science.

There are usually multiple ways to draw a trendline but from my experience, the best

trend line is applied by using the candle bodies and ignoring the tails, and let me

explain why I prefer this method.

The wicks on a candle show how far price went in one direction before market participants

decided to the reverse direction.

In my opinion closes are more important and they carry more meaning.

If a candle closed at a certain level, that means that market participants were ready

to accept this level as a market balance point.

Highs/lows on a candle are the maximum/minimum they were willing to pay over a certain time

period.

Thus, closes are the places where the majority of traders agree on a certain price level,

which makes the level more significant.

I recommend using a line graph to plot major trends and support and resistance as it focuses

on the close price.

Draw a few trendlines on a line chart, then change to candlestick view and see how irrelevant

the tails can be.

2.

Treat trend lines as areas Price is a very dynamic concept, and volatility

and momentum can affect price moves in significant ways.

This is especially true when we look at trendlines.

When traders are trying to place a trade at a very obvious price level, the professional

traders know this ,and they will do their best to kick out the amateurs by letting price

spike through levels or make it turn before the actual level.

To overcome this shortcoming and to improve your trading skills, you need to start using

areas instead of just single trendlines.

By using areas, you can create “noise zones” and filter out a lot of market noise.

If you use trendlines as zones, then you don't need to worry about drawing trendlines along

the exact highs or lows.

You draw "trendlines of best fit."

3.

The more connecting points, the better As a general rule of thumb, the more times

a trendline has been hit and respected with a bounce, the more important the level is.

To truly validate a trendline, you need to see the price react from a line projected

from a trendline drawn based off of two prior points.

Essentially, a third high/low is needed to truly solidify a trendline.

Once you have this, you can then feel better about looking for opportunities to exploit

the market when price reaches the trendline again.

4.

Spacing between connecting points matters The lows used to form an uptrend line and

the highs used to form a downtrend line should not be too far apart, or too close together.

The most suitable distance apart will depend on the timeframe, the degree of price movement,

and personal preferences.

If the lows (highs) are too close together, the validity of the reaction low (high) may

be in question.

If the lows are too far apart, the relationship between the two points could be suspect.

An ideal trend line is made up of relatively evenly spaced lows (or highs).

So, why it’s important to measure the time between consecutive touches?

Well, before a breakout occurs, the price tends to cluster around the trendline and

the time between the consecutive touches tends to become shorter.

As you can see on this example, we draw a trendline that connected several higher lows.

As the uptrend started to lose momentum, the times between each consecutive touch on the

trendline became shorter.

Finally, the time between the last two touches was very short, after which the price broke

below the trendline and started a strong downtrend.

Buyers weren’t strong enough to defend the trendline as sellers kept pushing the price

lower.

So if the market repeatedly tests a trend line many times in a relatively short period

and the price cannot drift far from that trend line, then a breakout will likely happen.

Most of the time, the market will break through the trend line and attempt to reverse the

trend.

Of course, this is not always accurate, but when I see this pattern, I’m inclined to

trade a breakout, rather than a continuation play.

5.

The angle of the trendline matters As the steepness of a trend line increases,

the validity of the support or resistance level decreases.

A steep trend line results from a sharp advance (or decline) over a brief period of time.

The angle of a trend line created from such sharp moves is unlikely to offer a meaningful

support or resistance level.

Even if the trend line is formed with many valid points, attempting to play a trend line

break will often prove difficult.

6.

The most profitable trades are in the direction of the trend line

Once a trend has been established by a series of trending highs and lows, the most profitable

trades are in the direction of the trend line until the trend line is broken.

Every time the market pulls back to the area around the trend line, even if it undershoots

or overshoots the trend line, look for a reversal from the trend line and try to enter in the

direction of the trend.

One of the most important points that everyone needs to accept as reality is that most breakouts

fail!

The market repeatedly races toward a trend line with very strong momentum, and it is

easy to get caught up in the strength of the bar and overlook the big picture.

For example, when the market is trending up, it has many strong sell-offs that quickly

drop to the bull trend line.

This makes beginners assume that the market has reversed and they sell just above, at,

or below the trend line.

While beginners are shorting near the bull trend line, experienced traders are doing

the opposite.

They have limit orders to buy at and just below the trend line, or they will buy there

with market orders.

The market usually has to go at least a little below the trend line during a sharp sell-off

to find information.

It needs to know if there will be more sellers or more buyers.

Most of the time, there will be more buyers and the bull trend will continue.

7.

Re-adjust your trend line after each break After a trend line break, the chances are

high that the area will get tested after a pullback.

Depending on market conditions, the test can be followed by the trend continuing in the

initial direction, in which case you must re-adjust the trendline with the new swing

created.

Prices don't usually move in a uniform fashion, and since trendlines account for both time

and price, they move along the price and time axis.

This means that any acceleration or deceleration of the trend requires adjustments to the trendline.

To decide whether a trendline should be adjusted, or whether it has been definitely broken,

consider how the price moves within a trend.

During an uptrend, for example, the price makes higher highs and higher lows.

As long as that keeps occurring, if the price moves below the trendline it doesn't necessarily

mean the trend has ended, the trend line just need to be adjusted.

8.

Only draw trend lines when it makes sense The reality is that not all trend lines have

the potential to generate a trade.

The best trend lines are the most obvious ones.

Look for every swing point that you can find and see if there is an earlier one that can

be connected with a trend line, and then extend the line to the right and see how price responds

when it penetrates or touches the line.

You don’t want to have unnecessary lines on your chart when trading, because you don’t

want distractions.

Also, you need to focus on the bars and see how they behave once near the line, and not

focus on the line itself.

As a trend progresses, counter trend moves break the trend lines and usually the breakouts

fail, setting up with trend entries, as we discussed before.

Each breakout failure becomes the second point for the creation of a new, longer trend line

with a new slope.

The point is that you should never try to force a trend line to fit.

If a trend line doesn’t fit well, it’s probably best to move on to another pattern.

9.

Higher time frames trend lines are the most important lines

The longer a trend line is respected, the more important it becomes.

A trend line that extends over two weeks will always be considered more important than a

level that only extends on the course of a trading session.

To get the very best results with trend lines, I prefer to use higher time frames, like H4

or D1 charts.

Most large banks and institutions are only watching those larger time frames.

So it would make sense to look at trading these yourself, to be in line with the traders

who actually move the markets.

Another reason why I prefer to use higher timeframes for drawing trendlines, is because

of the reliability it gives you.

Compared to the lower time frames, the H4 chart will cut out all of the noise that comes

with trying to draw a viable trendline.

10.

Use trend line channels to take profit when buying/selling near the trend line

A trend channel line is on the opposite side of the price action from the trend line and

has the same general slope.

In a bull trend, for example, a trend line is below the lows while a trend channel line

is above the highs, and both are rising up and to the right.

A trend channel line is a useful tool for fading a trend that has gone too far, too

fast or to take your profit if you entered a long position around the trend line.

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Until next time.