Trend lines are a form of diagonal support and resistance. These are drawn and identified the same way as horizontal support and resistance. Draw a trend line by connecting two lows in an uptrend or two highs in a downtrend. It takes two points to draw a trend line, but the third touch will confirm it. After that you have confirmed diagonal S/R.
The Basics of Diagonal Support and Resistance
Remember, in a downtrend, you have to connect the highs and in an uptrend, you have to connect the lows. Here is a picture to help you understand better:
As you can see, price touched the trend line several times and every time it did so, price was rejected and headed for new highs. After the third touch, we had a confirmed trend line. You could trade the second touch, but it’s riskier.
Here is a picture for the down trend line. The same principles apply, but we connect the highs in a downtrend.
One more important thing about trend lines is that the steeper they are, the most likely they are to be broken. Always look for the ones that are not too steep as they will be more reliable.
Never try to adapt the market to your trend line. If you cannot draw it correctly, don’t draw it because it is not valid and will not help you in making good trading decisions.
So, in an uptrend we can buy when price touches a confirmed trend line and in a downtrend we can sell when price touches a confirmed trend line, keeping in mind that, just like horizontal S/R, trend lines can fail and price will go through eventually.
There is another form of diagonal support called a channel. This is drawn by adding a parallel line on the other side of price, after we have drawn the trend line. Look at the picture to have a diagonal support and resistance visual representation:
As you can see, the upper part of the channel serves as diagonal resistance and the bottom part is diagonal support. Generally, a good place to sell in an uptrend is at the top of the channel and a good place to buy is at the bottom.
Trend lines are one of the easiest form of technical analysis and, one of the most underutilized. They do have a disadvantage: they are subjective. Different people can draw a trend line in different ways. That’s why just a trend line will not make you a trader. Much more must be taken into consideration when you trying to predict where price will go, but nonetheless trend lines are a powerful tool and every aspiring trader must get used to drawing them on the charts.
In the next article, we are going to speak about dynamic support and resistance and you will love it because it draws itself.