Today I would like to go more in depth about technical analysis. One of the most common and easy tools to use in technical analysis are trendlines. Although they are easy to use, trendlines are often mis-understood and underutilized.
To start, what is a trendline? A trendline is a line that is drawn over pivot highs or under pivot lows to show the prevailing direction of price. A trend line can also be a visual representation of directional movement, known as velocity. Velocity is a measure of an objects speed and its direction. So when applying velocity to price action, first, price speed can be viewed as how much price has moved over a given time frame. Second, price direction can be viewed as the angle that price is moving. A simple way of thinking about price direction is to imagine a clock and deciding what time price points too ( between 12 and 6). This is explained in greater detail in the video. So now that we have established what is a trendline, how do we use them? There are two general methods for using trendlines. First, is to establish an entry when following a trend. Second is too look for a break in the trend , as a possible reversal entry.
The first method is too look for a trend to establish itself. In an uptrend this means that price is making higher highs and higher lows, in a down trend the opposite is true. Once you have established a trend is present, you draw a trend line from pivot high to pivot high in a down trend and pivot low to pivot low in an uptrend. You then project the trend line into the future and look for price to pivot from it once again. If price does bounce off the trend line ,then this indicates a buy/sell single.
The second way to use a trendline is to have an established trend, and then draw a trend line. You then look for a break in the trend line. If price breaks the trendline this can be seen as a a possible reversal.