Tutorial on Trendlines in Bullish & Bearish Trends
Drawing a trendline should be the easiest thing in the world: The very definition of a trendline is to connect two single points and then extend the resulting line on the right side of the chart. A trendline has multiple uses in the technical analysis field, the most important one being the support and resistance areas that result. While many people assume to know how to draw a trendline, few manage to do it properly. The thing is that to correctly draw a trendline, there are some rules to be respected, and some conditions to be met. Like the name suggests, a trendline should define a trend, and should be the line of a trend. Depending on the timeframe the trend is forming over, the trendline might offer stronger support or resistance, the longer the timeframe is. A monthly chart trendline defining a strong trend is going to be difficult to be broken by future price action. This doesn’t mean that it is never going to be broken; only that the price will probably hesitate multiple times on the trendline.
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Higher Lows/Higher Highs and Lower Lows/Lower Highs
The key for correctly drawing a trendline is to look for a series that will define the future trend. If the trend is believed to be a bullish one, then the thing to do is to look for a higher lows/higher highs series. On the other hand, if the trend is a bearish one, look for a lower lows/lower highs series. Both series are mandatory for any trend, and the line that defines the trend, the trendline, can be drawn based on the maximum/minimum points in that series.
Trendlines in Bullish Trends
A bullish trend is characterised by a series of higher lows and higher highs, and this is what is going to help us identify the trendline that will mark the overall trend. Here are the steps to follow to correctly draw a trendline in a bullish trend:
- Wait for the market to bounce from a bearish trend and make a higher low when compared with the previous one. This is the first sign that the previous bearish trend is faltering, or losing its strength.
- Next, look for the market to make a new high when compared to the high made prior to the higher low. This high should be broken in a violent manner. At this moment of time, the conditions for drawing a bullish trendline are met: We have two points!
- Connect the two points and draw the trendline further to the right side of the chart. The result is a bullish trendline that will govern the newly created bullish trend.
The very idea of a bullish trendline is to give support every time it is tested by future price action, and the longer the timeframe is, the stronger the support is. Again, such a series on the longer timeframes will result in a trendline that is difficult to break.
A bullish channel can be derived from such a trendline as well, by copying and pasting it at the top of the first swing higher after the bearish trend ended.
Trendlines in Bearish Trends
On the other hand, a bearish trend is characterised by a series of lower lows and lower highs, and this is what is going to help us identify the trendline that will mark the overall trend. Here are the steps to follow to correctly draw a trendline in a bearish trend:
- Wait for the market to break from a bullish trend and make a lower low when compared with the higher low in the bullish trend. This is the first sign that the previous bullish trend is faltering, or losing its strength.
- Next, look for the market to make a new low when compared to the low made prior to the lower high. This low should be broken in a violent manner. At this moment in time, the conditions for drawing a bearish trendline are met: We have two points!
- Connect the two points and draw the trendline further to the right side of the chart. The result is a bearish trendline that will govern the newly created bearish trend.
The very idea of a bearish trendline is to give resistance every time it is tested by future price action, and the longer the timeframe is, the stronger the resistance is. Again, such a series on the longer timeframes will result in a trendline that is difficult to break.
In the chart above, we cannot draw a bearish channel. Following the principle described in the bullish set-up a bit earlier, we can draw a bearish channel, only that this channel is going to be broken by future price action. This tells us nothing except the fact that the trend is even more aggressive than previously thought, and that the main trendline, the one you can see in the chart above, is the one that is governing the whole trend. By the time it is broken, we can assume that the trend is starting to lose its strength. Some claim that using this principle to draw a trendline after a bullish or a bearish trend ends is a lagging process, and the reversal is missed. This is indeed true, but it saves you the trouble of trying to catch a bottom or a top, which can be a costly process.
In a way, following the steps mentioned above is a more conservative approach. If one wants to have an idea regarding when the market might turn, then looking at possible reversal patterns might help. Such reversal patterns are described here on our Forex Trading Academy project in the Japanese Candlesticks section (hammer, hanging man, bullish and bearish engulfing, piercing and dark-cloud cover), as well as in other articles dedicated to rising or falling wedges, head and shoulders patterns, etc. Divergences are useful as well, and for this, oscillators play an important role. However, trying to catch a top or a bottom can result in unexpected losses, and it is more important to simply wait for the market to turn, to break the previous lower highs or higher lows series, and then to enter a trade when the newly created trendline is retested. In this way, the trader is being disciplined, chances for the trade to result in a profit are increased, and the overall trading plan leads to an increase in confidence and morale as well. After all, patience is needed when trading the Forex market, and the more patience a trader has, the more profitable his/her trades will be.
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- Trading with the Cloud – Use Ichimoku Cloud to Spot Reversals
- Forex Market Terminology
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Recommended further readings
- Multiple line-segments regression for stock prices and long-range forecasting system by neural network. Takahashi, T., Tamada, R., & Nagasaka, K. (1998, July). In SICE’98. Proceedings of the 37th SICE Annual Conference. International Session Papers (pp. 1127-1132). IEEE.
- Inflation and real disequilibria. Astley, M.S. and Yates, A., 1999.