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How to draw trendlines on cryptocurrency charts

In Trading

Technical analysis can vastly improve your trading.

But the deeper you dig into technical analysis, the further it goes.

There’s no end of theories to read and indicators to learn about – it’s the fascinating study of essentially human psychology using statistics.

Just scratching the surface of technical analysis is enough to learn a lot about price action, helping you enter trades and generate profits.

Trendlines are a great place to start. All you have to do is identify trends on a chart, draw your trendlines and then watch how the price interacts with them.

In this article we will look at:

  • How to draw trendlines
  • How to use trendlines in your trading

How to draw trendlines

Trendlines aren’t only drawn on price charts. You can also draw them on indicators to give you a holistic overview of momentum and price movement.

At first it will be slightly tricky. As you start to draw trendlines you will begin to get better at spotting trends.

To get started, all we need is a chart.

 

On the chart, click the trendline button to start drawing.

 

To find where to draw a trendline, start at a high point and draw down the trend. Other parts of the chart should touch the trendline.

Alternatively, start at a low point and draw up a trend. 

 

You cannot draw a trendline with a candle closing on the other side of the line. Once the trendline is broken, it should be taken as a trading signal.

The more touches the trendline has, the more important it is.

In the picture below, a candle has not successfully closed below the trendline, so we can view this trend as still in tact. The price briefly fell below, but returned back above the line.

 

You have the option of drawing trendlines from wick to wick, or from body to body. It is entirely your choice, but whichever you choose, you have to be consistent.

If you are drawing your trendlines with wicks, like the picture above, you can use any wick as your points.

If you are drawing your trendlines with candle bodies, for uptrends you must use the close of red candles underneath the trend, and for downtrends use the close of green candles above the trend.

Here’s an uptrend, drawn with candle bodies:

 

Here’s a downtrend drawn with candle bodies:

 

Notice how once a green candle manages to close above the trendline, the downtrend is broken and there is a big upward movement.

Below is an example of how you can draw trendlines on an indicator chart. The image shows a channel drawn on the daily RSI for Bitcoin.

 

Channels are essentially parallel trendlines that a chart is following. One is an upper limit and one is a lower limit.

How to use trendlines in trading

Not all trendlines hold the same weight. As previously stated, the more times a trendline has been tested, the stronger it is thought to be. Similarly, if it is drawn on a longer time frame it is viewed as stronger.

Since a trendline shows a trend, if the line is broken, it would imply that the trend has broken and that the trend may reverse. Traders use trendline breaks as trading signals to trade against the trend.

As always, wait for confirmation before trading against the trend. It could be a failed test.

As you can see in the picture below, a break of the trend preceded a large upward movement. Price adhered to this trendline for almost a year, which shows the strength of it, and explains the size of the resultant break.

Notice how price broke through a few days before the large increase. Traders could have noticed the trend break and entered positions, anticipating the large upward move.

 

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

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