Recognizing and drawing key levels are the foundations of technical analysis.
Just as you can’t build a house\business without first making sure that the foundations are solid, the same goes for learning a new skill.
You can’t be a rocket science without first having an in depth understanding of math and physics… and you can’t be a technical trader without knowing how to recognize and draw trend lines and structures.
Trend lines and structures are the foundations of my Price Zone’s method. Way before Fibonacci levels, harmonic trading patterns and Price Action techniques.
If you can’t understand trends, no Indicator in the world will help you – you are doomed to fail in trading.
That’s is why I’ve decided to prepare a short and simple guide that will take you back to the basics and show you how to draw and trade trend lines. The proper way!
Drawing trend lines
The problem with drawing trend lines is that it is subjective.
Give three people a chart and you’ll get three different trend lines.
There’s no right or wrong here. If you drew a trend line and it works – it’s good enough.
The 5 steps guide below will show you the way I’m drawing my trend lines.
The basic rule I have about drawing a reliable trend line is to find the position that creates as much price reaction to it as possible – Both when it is still relevant (trend is valid) and also after it breaks (see more details below).
The second rule is – Once you’ve marked your trend line, don’t move it. Minor adjustments are acceptable but usually corrections are made as a result of emotions interference.
5 steps to draw and trade trend lines
The 5 steps explained below will help you understand the basic rules mentioned above about trends lines and provide you the knowledge you need to start practicing your trend lines drawing skills.
Step One – Recognize the Trend
A Trend is made out of a series of higher highs and higher lows (uptrend), or a series of lower highs and lower lows (downtrend).
The first thing that you need to do when you open a chart is to recognize the trends.
Step Two – Connect the dots
Once you’ve recognized a trend, you need to draw a trend line. You do that by connecting the lows with one straight line in an uptrend, or connecting the highs in a downtrend.
As mentioned above, there’s no right way or wrong way – The key is to position the line in a way that it will score the most hits (price reacting to the trend line).
Here are two different examples of trend lines with similar strength to the ones I showed above:
Step Three – Fine tuning
In order to be more accurate and find the optimal position for your trend line, you should zoom into lower time frame (down one scale) and adjust your line again based on the basic rule – Find position that has as many price hits as possible:
Step Four – Role reversals
This step is relevant when you draw a trend line for a trend that is already over.
Just like the case structure levels (support turns to resistance and resistance turn to support), Trend lines also change roles from support to resistance (as you can see below).
It is highly effective to understand this role reversal if you are a counter trend trader.
It can help you to find entry levels to trade against the exhausted trend.
Step Five – Trade
Once you’ve recognized the trend and marked the trend line on your chart it is time to take action and trade.
Trend Trading Rules are simple:
Buy when the price is testing the trend line. You keep doing that as long as the price stays above the uptrend line.
The opposite goes for downtrend lines – Sell when the price is testing the trend line as long as it stays below it.
Counter trend trading:
When the trend line is breached, it is time to consider counter trend trading entries.
In such case you can sell if the price is testing an uptrend line from below or buy if the price is testing a broken downtrend line from above.
As you can see drawing trend lines isn’t complicated.
Just like for any other technical analysis related skill, you need to train yourself by drawing trend lines on chart and optimizing them based on price reaction.
Once you’ll train enough you’ll will recognize that many times trend lines line up with certain MA lines. This can also help you with positioning your trend lines.
The next step will be to find places in which trend lines, structure, fibonacci and patterns all meet to create an attractive trading spot.
These are Price Zones.
If you’ll learn how to find high quality price zones and focus on trading them, you’ll be one of the 10% that make money in this market and finally you’ll escape the boom and bust cycle.