The trend line is included in the important factor of the chart pattern as it indicates a significant price level. Thus, understanding the trend lines and what they indicate is critical to the success of technical analysis.
In an uptrend, which is marked by higher high and higher low, with a higher low level called low correction or low reaction because the market corrects overbought condition. A trend line can be pulled below the low correction level that connects two or more low levels.
The trend line connected by only two low correction levels is the temporary trend line (not significant) and only confirmed when the price reexamines the trend line and succeeds. For example, the price touched the trend’s line and bounced for a third time. If a trend line has been identified, it can be used to identify potential areas that support the subsequent correction.
Should the price break through the trend line, for example, break or break the trend line and close below it, the trend may be broken or become invalid. However, only the lower low will confirm an upward trend reversal. In addition, an increase in the volume of current movement increases the translability validity. While the volume decrease increases the false break probability.
Furthermore, drawing a trend line is actually more of an art than a science and takes a little time to get it right. As a guide, draw a trend line along a solid area of the candle and not on the tip of the spike. This is the most preferred method of most technical analysts.
The same goes for the downtrend. It is characterized by lower low and lower high. The lower lower level is called a reaction or a high level correction as the market tries to correct oversold conditions. A trend line can be drawn above the trend to connect two or more high correction.
The trend line connected by only two high correction levels is the temporary trend line (not significant) and only confirmed when the price re-examines the trend line for the third time without breaking it. This trend line is a potential area of resistance for the next high correction.
When the price breaks the trend line and close above it, then the trend line can be translucent but the reversal of downtrend is only confirmed by higher high.
The strength or significance of the trend line increases each time the price re-tests the trend line without having to break it or break it. In addition, trend lines on graphs with longer timeframes have greater meaning than trend lines on graphs with shorter time frames.
If you already understand what is the trend line and how to identify, then your trading opportunities will increase.