The crypto markets fluctuate up and down in a seemingly random manner, reflecting the current mood of all the market traders. At any one time, the market is doing one of three things.
- It is in an upward trend.
- It is moving sideways.
- It is in a downward trend.
Regardless of the asset class involved (ETF, futures, cryptocurrency spots), it’s highly recommended that you start your trading journey by acquiring a basic understanding of what is a trend line or trendline. Hence, this guide will explain everything you need to know about crypto trend lines.
What is a Trend?
A trend occurs either in an upward or downward direction. An upward trend is when you can draw a line linking three or more lows, where each low is higher than the previous one. A downward trend is a line connecting three or more highs where each high is lower than the previous one
The number of highs or lows that bounce off these lines, the stronger these lines become.
Understanding Trend Lines
In simple terms, a trendline is a line drawn through a market chart to show the trend. In the context of crypto trading, trendlines are drawn on an asset’s price charts to show the trend in the price. Trendlines have been used as an effective price action technical indicator across various financial markets, including stocks, forex, commodities and crypto. Traders use trendlines to determine whether to buy or sell in the direction of the trend.
The most common kinds of trendlines are described as linear, logarithmic, polynomial, power, exponential, and moving average.
How to Draw Trend Lines
To place or draw a trendline, you will need to look for two or more spots — highs and lows, and link them with each other. Sometimes, traders draw three points to determine the asset’s price direction. Ultimately, there is no one-way rule to drawing trends; it’s up to the trader himself to determine the most accurate prices to connect.
While some traders connect the closing prices of the candles, others combine open, close, high and low prices. The more prices the drawn trendline comes in contact with, the more accurate the line might be.
Once you have drawn the trendline, it can be reused in the future. The line now becomes a possible tool for future price reversals, and the price bounces off this.
The reliability of trend lines is determined by the following:
- How many points has it touched previously?
- When the price touches the line, are there any conjunctions? A conjunction is where two or more distinct indicators provide the same signs.
- Possible conjunctions can include Fibonacci retracements, candlestick patterns, round numbers, support and resistance lines, pivot points and others.
- Other lines at higher time frames can also sometimes confirm trend lines at the time frame you are studying. For example, if you are studying the daily chart, then it is sensible to look at the weekly chart to identify weekly timeframes. Generally, trend lines at higher time frames are stronger than at lower time frames, as they have had more time to form and probably hit more points.
What do Trend Lines reflect?
Trend lines are among the fundamental tools of crypto trading. The lines are based on historical price action and are drawn on charts and help traders predict the overall direction of a crypto asset price.
In addition, trend lines help traders spot price reversal to decide on a good entry and exit point. They also help you in deciding the ideal spots to put your stops.
While trend lines are a great technical analysis, too, it’s usually daunting to draw them at the right spots on the trading chart.
Drawbacks of a Trend Line
Trendlines are limited in terms of price adjustments.
As most price data increase, the drawn trend lines need to be constantly readjusted.
Further, using trend lines means the trader selects different data points to connect. For example, some traders use the lowest lows, while others may only use the lowest closing prices for a period.
Additionally, using trendlines on smaller time frames can be affected by volume. A trendline based on low volume may be vulnerable as the volume increases.
Wrapping Up
Trendlines form the basis of crypto trading, as it helps traders determine price directions to determine the best time to enter or exit a trade. However, they are not foolproof for making profits; it’s important to combine them with other technical analysis tools to make the best trading decisions.
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