How to draw trend lines

Chart Types
To start the very trend analysis, types of charts used in it should be defined. They can be divided as far as the type of data presentation and scale are concerned.

Data presentation:
● line chart
● candlestick chart
● swing chart
● other
     

Scale:
● logarithmic
● arithmetic
     

In general, we recommend line charts (closing rate) and candlestick charts (the opening, maximum, minimum and the closing). The basic scale should be the logarithmic one, which in many cases best reflects strong price movements. At the same time, we recommend observing charts also in the arithmetic scale, which often shows other relations than logarithmic scale and may serve as its supplementation.

Basic notions
Depending on the movement of the price, the trend may be divided into:
- upward
- downward
- horizontal

Depending on the duration of the trend, there are its three degrees:
- short-term
- medium-term
- long-term

This division is only apparently easy. The majority of fledging traders (and unfortunately not only fledgling ones) make the above mentioned division on the basis of the duration of the trend. In general, it is said that a short-term trend lasts up to 3 weeks, a medium- term one from 3 weeks up to 3 months and a long-term one…..This division makes unfortunately no sense.
Trend degrees should not be defined on the basis of trend’s irrelative duration but on its relative duration with respect to adopted trading horizon! For a trader using 5-minute data, a long-term trend could be defined as a trend lasting one day, month or a year. On the other hand, for somebody, who invests capital for e.g. 25 years, a two-year or three-year price movement should be only called a short-term trend.
A trend should always be defined with respect to adopted trading horizon, irrespective of its irrelative duration. Thus, a movement lasting two weeks may be a long-term trend for one trader and for another one it may be only short-term. It all depends on the trading horizon of each trader.

1. Short-term trend
It is a trader horizon, within which a trader intends to maintain his/her open position. This scale is usually used to find purchase and sale signals.

2. Medium-term trend
It is used to choose certain analyzing techniques. It should be consistent with the direction of a short-term trend in case of using trendfollowing techniques or should be opposite to a short-term trend if we use countertrend techniques.

3. Long-term trend
It defines the security of a trade. If its direction is consistent with the direction of a medium-term trend, the probability of success increases, otherwise the risk of loss increases.

Techniques to recognize a trend direction
It is usually not difficult to find trends on historical charts. Upward periods clearly intertwine with downward periods and horizontal movements. The whole art is not about indicating a trend on the basis of historical data, but to recognize the change of a trend at the present time, early enough to be able to open position at a low risk. There are many techniques to define a trend. Some of them are better to analyze and forecast future price levels, some are used in trading systems, while other may be used to define the probability of trend reversal. The most popular are the following:

1. Extremums
- increasing or decreasing highs and lows

2. Trend lines
- the direction of a trend line’s inclination

3. Moving means and other indicators
- direction change of an moving average
- mean scale

     

Techniques to recognize a trend change
It is usually not difficult to find a trend direction, but recognizing the point in which the change actually occurred is a much more difficult. Depending on methods we use, we can always acquire a slightly different outcome:

1. Extremums
- highs’ and lows’ break inconsistent with the direction of a given trend
- change of configuration of rising or falling highs and lows

2. Trend lines
- a trend line break

3. Moving means and other indicators
- direction change of the moving average
- intersection of means

Extremums and trend lines
Price extremums and trend lines are basic techniques to define a trend in technical analysis. Both methods are strongly correlated and in the majority of cases, the same methods of opening and closing of the position are used. Thus, we will alternately use the both techniques below.

How to draw trend lines
A trend line links next highs and lows on the price chart. In case of an upward trend, the line goes through the lows and in case of a downward trend it goes through the highs.

  
Depending on the logarithmic or arithmetic scale, the chart will look slightly differently and it would be possible to draw the trend lines. In general, in case of strong price movements, we recommend a logarithmic scale. It is also worth observing the market with the help of an arithmetic scale, which will give us additional hints.

  

The importance of a trend line
Two basic factors define the importance of a trend line: a slope and the number of fulcrums (the number of extremums it goes through). The greater the slope is, the higher the probability of the line break is. The more dynamic the price is, the faster the target level is achieved, which will result in a trend reversal or appearance of a correction connected with the market overbought or oversold.
The importance of a trend line is also defined by the number of extremums it goes through. A line linking three or four extremums is stronger than a line linking only two points. If there is a possibility to draw a few trend lines lying next to each other, a basic line should usually be the one that goes through the biggest number of the highs and lows. At the same time, the more fulcrums there are, the less important the next extremum is, through which the line goes. It can be said, that a line linking 7 extremums is just little more stronger than a line linking 5 extremums. Moreover, irrespective of the fact, through how many highs and lows the line goes, the price can always beat it.

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