What are Trend Lines?
In addition to the levels of support & resistance, trend lines are equally as important in technical analysis. Many of the principles that apply with support and resistance levels can be applied to trend lines as well.
An uptrend has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope.
Uptrends act as lines of support and indicates demand is increasing even as the price rises. As long as prices remain above the trend line, the uptrend is considered valid. A break below the uptrend indicates that sellers have overtaken the buyers and a change in trend could be imminent.
A downtrend has a downwards slope and is formed by connecting two or more high points. The second high must be higher than the first for the line to have a downwards slope.
Downtrends act as lines of resistance and indicates that demand is decreasing as the price is falling, which is very bearish. As long as prices remain below the trend line, the downtrend is considered valid. A break above the downtrend indicates that buyers have overtaken the sellers and there’s a great possibility there could be a change in trend to the upside.
Example of Trend Lines
Looking at the monthly time frame of BTC (Bitcoin) we can see both an uptrend & downtrend created. The uptrend stems from the start of the uptrend sparking the bull run in 2017 connected to the swing low of the 2019 dump, and confirmed by the wick after the coronavirus dump. The downtrend was formed by the absolute swing high of the 2017 bull run at $19,600 and connected to the absolute swing high of the 2019 bull run at $14,200, until it eventually broke out to the upside in the summer of 2020.
How to Identify Uptrends & Downtrends
It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the uptrend & downtrend.
The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.