One of the oldest sayings on Wall Street is: "The trend is your friend until the end."
Yet, most beginner traders do the exact opposite. They see a stock or asset rallying hard and instantly look to short sell it because they think "it's gone up too far." Or they see an asset crashing and try to catch a falling knife because "it's too cheap."
Trading against market momentum is like swimming upstream in a rapid river—it exhausts your capital. Here is a simple guide on how to identify market trends and use trendlines to enter trades with high probability.
What Is a Market Trend?
Prices don't move straight up or straight down in a single line; they move in a series of waves (higher highs and higher lows, or lower highs and lower lows).
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– Uptrend: Price makes higher highs (HH) and higher lows (HL). Buyers are in total control.
– Downtrend: Price makes lower highs (LH) and lower lows (LL). Sellers are in total control.
– Sideways (Consolidation): Price bounces between equal highs and equal lows. Neither side has control.
How to Draw Trendlines Correctly
A trendline acts like a diagonal support or resistance floor/ceiling. To draw one properly on your chart, follow these simple rules:
Rule 1: Connect at Least Two Swing Points
– For an Uptrend Line, connect the prominent lows (swing lows). This line goes below price action.
– For a Downtrend Line, connect the prominent highs (swing highs). This line goes above price action.
Rule 2: Look for the 3rd Touch (Confirmation)
– 2 touches form a speculative trendline.
– 3 touches confirm an active, strong trendline that other traders are watching.
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Warning: Never force a trendline by cutting directly through the bodies of candlesticks just to make the line fit. If it doesn't align naturally, the market isn't trending cleanly—skip it!
The "Trendline Bounce" Trade Setup
When an asset is in a clean uptrend, you don't buy at random points. You wait for price to pull back to your diagonal trendline.
Step 1: Identify 2 Swing Lows ──> Step 2: Draw Trendline ──> Step 3: Wait for 3rd Touch & Bullish Candle
The Pullback: Wait for price to drop back down to touch your uptrend line.
The Confirmation: Look for a bullish candlestick (like a Hammer or green engulfing candle) right on the line.
The Risk Limits:
– Entry: At the close of the confirmation candle.
– Stop-Loss: Placed right below the trendline (if price breaks below the line, the trend is likely ending).
– Take-Profit: Set near the previous recent swing high.
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Forum Discussion: Do you prefer drawing horizontal Support & Resistance lines, or do you find diagonal Trendlines easier to spot? Share your chart setups below!
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