Highlights ①. Gate's "Basic Futures Courses" course introduces various methods of technical analysis that are commonly employed in futures trading. These courses aim to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators. ②. This piece will concentrate on trend lines, a key component of the trend analysis system. The article will delve into the composition of trend lines, the drawing methods as well as their application in market analysis.
1. How to draw a trend line?
①. What is a trend line?
A trend line is a graphical representation that illustrates the trajectory and inclination of market trends, serving as a crucial instrument for traders to more effectively monitor market dynamics. Essentially, it is an imaginary line that traders plot following certain guidelines.
Considered as visual indicators, trend lines map out the progression and patterns of trends. They are rooted in the principles of the Dow Theory, which defines bull and bear markets, and represent an integrated use of Dow Theory's three core tenets, alongside the principles of technical analysis and wave theory.
Trend lines, based on their orientation, can be categorized into upward trend lines and downward trend lines, as follows:
②. How to draw a trend line? a、Upward trend line An upward trend line is a straight line drawn by connecting the lowest point or a relative low point of a currency's price with any subsequent low point that occurs before the highest point within a specific time frame, provided that this line is not decisively breached by the currency's price action. The illustration below demonstrates this concept:
b、Downward trend line A downward trend line is a straight line that is plotted by linking the highest point or a relative high point of a currency's price to any subsequent high point that comes before the lowest point within a designated time period, given that the line is not significantly penetrated by the currency's price in between. The depiction below exemplifies this type of trend line:
2. Application ①. The trend line is a synthesis of Dow Theory, the foundational principles of technical analysis, and the concepts of wave theory. According to Dow Theory, a bull market is characterized by ascending price movements that consistently reach higher highs than before, and during pullbacks, create higher lows than previous downturns. In contrast, a bear market is identified by price movements that produce lower highs and lower lows successively. An upward trend line is thus derived by connecting the successive higher lows during an uptrend, while a downward trend line is constructed by joining the lower highs observed during each price rebound in a downtrend.
②. The trend line acts as a gauge or indicator for the trend, signaling the trajectory, direction, and slope of the movement. These lines visually encapsulate the analysis of trends as per Dow Theory and provide traders with a vital supplementary tool for trend analysis. The three key tenets of technical analysis are: (1) market action (currency price or index) incorporates and assimilates all available information; (2) markets tend to move in identifiable trends that are likely to persist, and (3) historical patterns tend to recur.
③. The slope of the trend line reflects the momentum of the market's upward or downward movement. An upward trend line with a gentle incline generally suggests a steady and sustainable rise that is likely to continue and is more challenging to disrupt. Conversely, a steeply angled upward trend line implies a vigorous surge in the market, but such a sharp rise is also more susceptible to reversal. The same principles apply to the analysis of downward trend lines.
④. A gently sloped trend line suggests that the current trend is stable, but once disrupted, it's likely that the trend could reverse. Even if the trend manages to resume post-interruption, its momentum may diminish, making it unlikely to reach new highs or lows. On the other hand, a trend line with a steep slope indicates that the current trend might be reversed easily, but this reversal is often just a temporary setback. After such a disturbance, the market frequently returns to its original trajectory and is prone to achieving new lows or highs.
3. Breakthrough of the trend line Breakthrough of trend lines is characterized by price rises or drops to surpass the trend line by 3%. The features of the pattern are as follows: ①. The currency price, which has been running along the trend line, breaks through the trend line either upward or downward. ②.After the breakthrough, the price goes higher or lower than the trend line with a difference of more than 3%. ③. The upward breakthrough of the trend line will be established only when the trading volume increases simultaneously, while there is no trading volume requirement to confirm a downward breakthrough of the trend line. ④. A breakthrough offers a more credible signal when, following the breach, the price line diverges from the trend line at an accelerated pace and exceeds it by a significant distance.
The technical meaning of breakthrough: ①. When the currency price breaks through the downward trend line upward, it signals the possibility for the market to reverse from bear to bull ; a. Notes: Such a breakthrough cannot be relied upon to open positions to buy assets. The trading decision should be made by consulting other technical patterns, moving averages, or other technical analysis methods. b. An upward breach of the downward trend line does not automatically signal a market reversal. The probability of a reversal is linked to the changes in trading volume and the duration covered by the breached downward trend line. Typically, a breakthrough that occurs alongside a significant increase in trading volume, especially if the trend line spans a lengthy timeframe, indicates a high chance of a trend reversal.
②. When the currency price breaks below the upward trend line, it implies that that market might have peaked and it is time to sell assets; a. When the upward trend line is breached, it serves as a cue for traders operating within the same trading cycle to close their positions and exit, and for those with longer trading cycles to scale back their holdings. Should there be two or more trend lines within the same cycle, the breach of any one of these would act as a signal to exit. b. The steeper the slope of the trend line, the more susceptible it is to being breached, and the less likely the indicated trend will endure, showing a heightened sensitivity to market fluctuations. Conversely, a trend line with a gentle slope often signifies a stable and enduring trend, but this stability can also mean a slower reaction to changes in the market.
4. Summary
In trading, trend lines are a valuable tool that aid traders in assessing the direction of the trend, identifying entry and exit points, and setting take-profit and stop-loss levels. Proper utilization of trend lines can notably enhance the profitability of investments. This article merely covers the fundamental aspects of the system. To truly benefit, one should strive to grasp the underlying principles of the system thoroughly and refine their comprehension through practical application in trading.
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Disclaimer This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders' insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
