What
A trendline is a line through two or more swing lows in an uptrend, or two or more swing highs in a downtrend, extended to the right. A swing low is a low with higher lows on both sides of it. A swing high is a high with lower highs on both sides. In an uptrend the swing lows step higher over time, so the line through them slopes up. In a downtrend the swing highs step lower, so the line slopes down.Read
Price respecting the line keeps the trend intact. Each time price comes back to the line and turns away from it, the trend has held one more time. A close beyond the line is the first sign the trend is tiring. It isn’t a reversal by itself. One common reading is that the move has lost its pace, and that the next swing will show whether the trend resumes or gives way.Watch
Steep lines break sooner. A move that climbs almost vertically can’t keep that angle for long, and the line that follows it is usually broken quickly. The trend can go on after a steep line breaks. The third touch is where traders start to trust the line. Two points make a line through anything. A third touch that turns price away is the first time the line has been tested rather than drawn. For example, in an uptrend price makes a low, rallies, pulls back to a higher low and rallies again. A line through those two lows is a draft. When the next pullback comes down to that line and turns up from it, that is the third touch, and traders often read the line as confirmed from there.Caveat
Trendlines are drawn, not found. Two traders looking at the same chart draw two different lines, through different lows, at different angles. Neither is wrong. Treat a trendline as a way of describing the trend so far, not as a prediction of where price will go next.Related
- Support and resistance: a price area where the market has turned more than once.
- Channel: a trendline with a parallel line on the other side.
- Box: sideways price between a level above and a level below.