cryptocurrency
A Complete Guide on Trend Lines and How to Use Trend Lines When Trading Cryptocurrencies
Recently, I grew enough capital to start trading cryptocurrencies. As a total novice in crypto trading, I’ve been studying and learning from the best on how to trade cryptocurrencies without fear of liquidation. One thing I’ve learned is how to make use of trend lines.
Crypto traders especially the pro traders make use of a lot of tools to predict how low or how high a cryptocurrency can go. Whether you make use of fundamental or technical analysis, trend lines are important when trading cryptocurrencies. You can use trend lines with a variety of strategies and indicators. What exactly are trend lines and how do they work? I will work you through this and how you can use trend lines to determine if crypto is heading for a bear or bull run.
What Are Trend Lines
A trend line is a straight line that connects at least two price points on a crypto chart. It can form the basis for your support and resistance. Before I proceed, let’s talk about support and resistance. You will be seeing more of these two words in this article.
In a crypto price chart, when a price has been on the rise and pulls back, the highest point it reached before pulling back is called the resistance point. At this point, there will be a surplus of sellers. Many traders will be selling at this point as they believe that is the highest price point and would want to make maximum profits.
If it keeps pulling back, pauses, and goes up again, the lowest point reached before it went up again is called the support point. At the support level, there will be a surplus of buyers.
As the price of any cryptocurrency goes up and down, it keeps forming support and resistance levels. A common trend of crypto traders is buying at the support level and selling at the resistance point.
With trend lines, you can see if a cryptocurrency is on a bearish or bullish trend. Trend lines are important as they determine the direction a coin is going.
The demand and supply of a coin usually determine the trend lines. They usually take three patterns which include the uptrend when the market goes up, the downtrend when the market goes down, and the sideways trend when the market goes sideways. Let’s talk further about two of these patterns.
Upward Trending Lines
How do you know you have an upward trending line? When you draw your trending line and it has a positive slope, that’s an upward trending line. It is formed by connecting more than two points on the lower shadow of the green candles. The next low point is always higher than the previous low point.
An upward trend line indicates a bullish season and that buyers are keeping the bull market alive. As the demand for that cryptocurrency keeps increasing, so will the price.
Downward Trending Lines
Unlike the upward trend lines, the downward trending line has a negative slope. You get a downward trending line by connecting more than two points on the upper shadow of the red candles. The next high point is always lower than the previous high point.
A downward trend line shows that the supply is high but the demand is low. This leads to a decline in price.
Drawing Trend Lines
Before I talk about how to draw trend lines, let me tell you three things you have to consider before drawing trend lines.
- Use Higher Time Frames for Drawing Trend Lines
To get the most reliable trend lines, use higher time frames. Drawing a trend line on a 15-minute price chart is one sure way to get liquidated.
A trend line drawn over a 1-year chart is trusted more than a trend line drawn over a 1-month price chart.
- Your Trend Line Needs to Connect to At Least Two Points on the Chart
You need at least two low points or two high points to start a trend line. Once you identify your second low point or high point, you can start looking for your bullish or bearish trend.
You should also know that most trend lines will overlap from the high points and the low points of the candle. What’s more important is that you get as many touches as possible without cutting through the body of the candle.
- Never Force a Trend Line
This is an important factor when drawing trend lines. So many traders fall into this trap. They are so convinced about an entry or exit level that they try to make the level for the price chart. This is called “curve fitting”.
The best trend lines are those that are obvious. You can not and should not force a trend line to fit your perceived pattern.
Okay, let’s move ahead and talk about how to draw trend lines. There are a few steps to drawing trend lines.
- Define your timeframe. Always remember that a higher time frame is more reliable.
- Zoom out the price chart to get a bird view of your chart
- Identify major swing points and draw a line that connects at least two major swing points. If you’re wondering what a major swing point is, it is a high or low point that is so obvious to the eye. Remember the third rule right?
- Adjust your trend line to get as many touches as possible but do not force it.
If you want to know more about how to draw trend lines, you can watch this comprehensive guide by Rayner Teo.
When to Enter/Exit?
Trend lines help you identify when to buy and sell your crypto assets. It’s a good idea to buy when the price has hit your support range and sell when the price is at the resistance range.
However, just like Samuel Joseph (CEO of Lightblocks) said;
“Nobody can perfectly predict the market. It doesn’t matter if you have many years of experience as a crypto trader, the market can disappoint anytime.”
With this in mind, it is always a better idea to wait for a ” bounce”. This is a confirmation that your support or resistance levels have not been broken. Although this means that you won’t buy at the lowest entry point or sell at the highest exit point, it is better to get little profits and prevent unwanted losses or even liquidation.
You should also know how to trade and set tight stop losses to ensure you’re not deep into a particular trade. If the chart doesn’t go as predicted, stop losses will help you reduce your losses. You don’t want to get a liquidation message from Binance ?.
If you’re wondering how you can trade without the risk of liquidation, you can check this course on Blockchain University. It is a lifesaver.
Conclusion
Trading can be fun. The excitement you get from predicting a market and watching play into your hands is second to none. It’s even more exciting when you put your money where your mouth is and see it earn more money for you.
However, predicting the market is not a matter of luck. You use the best tools to study the market and see which direction it’s headed in. One easy tool you can use is your trend lines.
Using trend lines is vital to trading. Although they are not foolproof, they give you a sense of direction and an idea of when you buy, HODL, or sell your crypto assets.
