Trends and Trendlines Explained

 

Hello there, this is tradingpedia.com, and this video deals with trends and trendlines. Basically we will look at what a trend is, the rules of a trend, and what changes a trendline or how can we adapt the trendline based on how the market is moving.

This is the GBPUSD 4h chart, it shows the recent price action on the pair. We see it recovering dramatically from March 2020 lows from 1.14 to 1.32. Keep in mind that everything that we discuss here, remains valid for any market. No matter what you trade, as long as the market moves, trending conditions may appear.

A Trend is Your Friend

A trend is your friend, it is said by traders all over the world, and for a good reason. A trend is made by a series of higher highs and higher lows – that is a bullish trend. For example, the market bounces from the lows, and then makes a high, corrects a bit, makes another high, higher than the previous one, a higher high, corrects again, and so on. This series of higher highs in combination with a series of higher lows, are the prerequisites of a trend.

For as long as these series remain in place, the market will not reverse. Shorting such markets is dangerous, it should be done with limited risk, and the ideal way to trading them is to look for continuation patterns, like pennants, flags, and so on.

In a rising market you will focus on the series of higher highs, but also at the same time to fail to break the series of higher lows. These are trending conditions – imagine a trendline that connects these points. Basically, the trend is rarely a straight line, as some pullbacks do exist. In a trend, various market participants come on the long side, and then profit taking takes place, the market pulls back a bit, and so on.

If higher highs and higher lows are the characteristic of rising trends, then lower lows and lower highs are the characteristics of falling trends. For instance, the GBPUSD from 1.35 it fell to 1.14, but during that move lower, it actually formed a low, and then a lower high. Then another low came, a lower low, and a bounce that formed a lower high.

These are also trending conditions. A trend is not necessarily aggressive, and in the end, it forms a series or lower lows and lower highs.

Trendline

How about the trendline, how do we adjust the line of trend? We see that the market here fell, and then suddenly bounced and made a higher low.

If we take a trendline trying to connect these ones here, we see that the market broke it. What should we do – does it mean that the trend ended? No.

The way to treat it is to adjust the angle of the trendline by respecting the higher high and higher lows series. For instance, the market broke the trendline, it even broke the previous lower high, so we delete it, then reverses and makes a new higher high when compared with this one. From the moment that it made a new higher high when compared with this one, we take the trendline and connect the absolute low with the higher low and we follow the same principles.

We see that the market broke the trendline, but without breaking the previous lower high. This is a bullish sign, because it is for the first time when we have in place a series of lower highs. So when the market makes a new higher high, all we have to do is to adjust the trendline and drag it on the right side.

Bearish Trend

The same thing can be done on a bearish trend and adjust the trendline and by the time that the market breaks the bearish trendline, we have a confirmation that a reversal is in place.

Trendlines are used in rising and falling markets to build channels as well. For example you can copy this trendline and project it from the first higher high, trying to find out dynamic resistance.

Trendlines, while broken, suggest that the price is in trouble. But if the market keeps the series of higher lows in place, the rising trend remains valid. These principles work on any market, timeframe, and the bigger the timeframe, the bigger the implications for trends and trendlines.

Sum Up

To sum up, the trend is your friend. Focus on the series of higher highs and higher lows and lower lows and lower highs in bullish, respectively bearish trends. Draw a trendline from the absolute low to the first higher low in rising markets, or from the absolute high to the first lower high in bearish markets and adjust the trendline with every market dip or spike higher but only if the market does not break the series of higher lows or lower highs.

This way, you will always end up on the right side of the market. Thank you for being here and have a great day.