Technical analysis uses trendlines to assist traders in deciding whether to purchase or sell an asset. Trendlines work similarly to support and resistance lines in that they serve as levels where price can continue or reverse. The difference between trendlines and support and resistance is that trendlines are diagonal lines, whereas support and resistance are horizontal lines.
By linking two price points, you can create a trendline. A trendline is used to identify trends so that a trader can buy or sell an asset depending on whether the trend is heading up or down.
Identifying a trendline requires two price points, whereas verifying a trendline necessitates three price points. If the trend line is validated by the third price point based on the previous two, the trendline is a powerful tool for making decisions when prices are close to it.
Here are some points to consider while establishing a trendline:
A trendline's validity increases as the number of points increases.
The price points should not be too close together, as this will result in an incorrect trendline.
The trendline should not have a sharp angle since the steeper it is, the less likely it is to operate as a solid support or resistance level.
When two low price points join, an uptrend line is formed. During bullish trends, this trendline becomes a diagonal support level. The market remains positive as long as the price remains above the uptrend line. If the value falls below the uptrend line, however, it may indicate a negative trend reversal.
When two high price points meet, a downtrend line is formed. During negative trends, this trendline becomes a diagonal resistance level. As with uptrend lines, as long as the price remains below the downtrend line, the market is bearish. The market may become positive if the price climbs above the uptrend line.
An example of a recent trendline is on BTC/USD line chart on BigoMex.
Between 10:00-15:00 on July 26, 2021, there is an uptrend line that becomes a valid support as the market moves from roughly $38.000 to $38.600.
Although there are several other places touching the price, they are too close to each other. The price touches twice on two locations that are not too close to each other.
If a trader buys Bitcoin when the price meets the uptrend line as a support level, this line can result in a profit.
However, towards 15:00, this uptrend line eventually broke down. The break of the support level, where Bitcoin went from $38.600 to the prior horizontal support level of $38.000, could be a good location to start a short position.
Despite the fact that trendlines can be utilized for technical analysis, some traders believe that horizontal support and resistance lines are more dependable than diagonal trendlines. Combine both of these technical analysis tools to create a strong trading foundation.