Guide to Practical Applications of Trend Lines

What is a Trend Line?

In financial markets, a trend line is a diagonal line drawn on a price chart that connects specific data points, helping traders and chart analysts to observe price fluctuations more clearly and capture market trends. As one of the most fundamental tools in technical analysis (TA), trend lines are widely used in stocks, fiat currencies, derivatives, and cryptocurrency markets.

Unlike horizontal support and resistance levels, trend lines take the form of diagonal lines, which can slope either upward or downward. Generally speaking, the steeper the angle, the stronger the corresponding trend intensity.

Two Basic Types of Trend Lines

Trend lines are divided into two distinct categories. Uptrend lines are drawn from low points to high points, connecting two or more lows that show a gradually increasing level. In contrast, downtrend lines are drawn from high points to low points, connecting two or more highs that form gradually decreasing peaks. The core distinction between the two lies in the reference points chosen—the uptrend line uses the bottom low points of the candlestick chart, while the downtrend line uses the top high points.

The Practical Value of Trend Lines

Traders use trend lines to identify test points for prices in the short term against the main trend. When prices touch a trend line multiple times without breaking through, the trend line is considered valid. This repeated testing indicates that price fluctuations are not purely random movements, but rather reflect the underlying market demand structure.

The trend line also reveals the dynamics of supply and demand in the market. An upward trend line indicates that buying pressure is gradually increasing (demand exceeds supply), while a downward trend line reflects a sustained price decline, indicating that supply is dominant. However, when analyzing, one should also pay attention to the trading volume (handelsvolumen). For example, if the price rises but the trading volume decreases or is relatively low, it may create the illusion of increasing demand.

The Role of Support and Resistance

The ascending trendline indicates a support level, and the price is expected not to fall below this line. The descending trendline delineates the resistance range, and the price usually finds it difficult to break through this level. When these key levels are breached—whether it's a downward break of the ascending line or an upward break of the descending line—the market trend often signals a change in direction. In many cases, once support or resistance fails, the market will initiate a new direction of movement.

It is important to note that technical analysis is inherently subjective. Different analysts may use different methods when drawing trend lines. Therefore, combining various technical analysis techniques with fundamental analysis can effectively reduce trading risks.

How to Draw Effective Trend Lines

Technically, any two points can form a trend line. However, most chart analysts agree that using three or more points is necessary for it to be considered an effective trend line. In certain cases, the first two points are used to define the potential of the trend, while the third point (projected into the future) is used to validate its effectiveness. The credibility of the trend line is confirmed when the price touches the trend line at least three times without breaking through.

The Importance of Chart Scale Settings

In addition to choosing enough reference points, correctly configuring the chart settings is also crucial, especially the scale settings. In financial charts, the scale determines how price changes are presented. The two most common types are arithmetic scale and semi-logarithmic scale.

In an arithmetic chart, the price changes as it moves up and down along the Y-axis are evenly distributed. In contrast, a semi-logarithmic chart represents changes in percentage. For example, the change in price from $5 to $10 occupies the same distance on an arithmetic chart as the change from $120 to $125. However, on a semi-logarithmic chart, a 100% increase (from $5 to $10) occupies a much larger area on the chart, while a 4% increase (from $120 to $125) is relatively smaller.

Choosing the correct scale settings directly affects the drawing position of the trend lines, and each chart type may produce different high and low positions and trend line configurations.

Final Thoughts

Although trend lines are practical tools in technical analysis, they are far from infallible. The choice of points used to draw trend lines affects their accuracy in representing market cycles, which gives trend lines a considerable degree of subjectivity. For example, some analysts draw trend lines based on the body of candlesticks while ignoring the wicks; others tend to draw them based on the highs and lows of the wicks. Therefore, trend lines should always be used in conjunction with other charting tools and technical indicators. Common complementary TA indicators include Ichimoku Clouds (, Bollinger Bands ), MACD, Stochastic RSI (, Relative Strength Index ), and Moving Averages.