The trendline is a line that is drawn to try to hypothesize the market trend in the future. In the event of an uptrend, it is obtained by tracing a line that passes through relative minimum . In the case of a bearish trend, it is obtained by going through relative maximums .
When tracing the trendline it is necessary not to cut the candle body. It will be the graph that, evolving over time, will have the ability to cut the trendline and then going to “invalidate” even momentarily.
It should be noted that a trendline with a slope of over 45 degrees is to be considered steep, therefore unreliable. This means that with a very steep trendline there is a peak, and that very soon the trend could retrace (or decrease inclination) or even change.
A trendline with a gradient between 20 and 30 degrees is instead to be considered more reliable.
A third possibility is to find oneself in a phase of the market where prices move mainly horizontally. In this case we talk about indefinite trend .
Theoretical target can be obtained by drawing horizontal lines parallel to the previous relative maximums / minima:
- If this is an uptrend , the theoretical target will be obtained by drawing a line parallel to the previous relative maximum ;
- If this is a bearish trend , the theoretical target will be obtained by drawing a line parallel to the previous relative minimum .
If the trend line is violated, the probable target is re-calculated as follows:
- violated uptrend : the previous relative minimum is used ;
- downtrend trend : the previous relative maximum is used ;
this is because it assumes that, violating the trend line, it is likely to have a trend inversion.
NB: the price trend must always be supported by the volumes
The identification of the theoretical target can be done through three main techniques:
- Breakout : therefore supposing the violation of supports and resistances;
- Retracement :
- through the use of FANLINES
- through the use of parallel lines positioned on 33%, 50% and 66% of the excursion between the last maximum and relative minimum;
- Cycles : that is by identifying a channel;
RESISTANCE AND SUPPORT
The support can be seen as a line (or range of prices) towards which prices slow down their descent.
Resistance , in contrast, can be seen as a line (or range of prices) towards which prices slow down their climb;
The supports and the resistances can be of dynamic and static type.
The dynamic supports / resistances are oblique lines in the graph, and are nothing more than the trend lines. In the event of a bearish trend, the trendline assumes the character of resistance. In the event of an uptrend, however, it assumes the support character.
Stands and resistors of a static type , on the other hand, are given by points of minimum and maximum in the graph, and are therefore lines parallel to these points.
In the event of an uptrend , static supports are important, which often coincide with the previous relative maximum points , as well as the trendline that is also valid as support.
In the case of a bearish trend , the static resistances, which often coincide with the previous relative minimum points, are important, as well as the trendline which is also valid as resistance;
In the case of an undefined trend , it is possible to identify indicative supports / resistances using the technique of the tyron levels.
Below we show some examples of trendlines, as well as supports and resistors:
Immagine1: Tradingview – examples of trendlines, supports and resistances on the BTC chart;
The levels of the tyron can be based on the median or on the average, and provide just horizontal lines to support / resistance to the horizontal trend .
The tyron levels, based on the median, are calculated as follows:
- It is identified with A the relative maximum and with B the relative minimum
- There are three further lines:
- Top-line = A – [(AB) / 3]
- Central-line = B + [(AB) / 2]
- Bottom-line = B + [(AB) / 3]
These 3 lines, together with A and B, form 5 levels of supprto. The method based on the average, identifies 5 additional levels.
It is obtained by tracing, in parallel to the trendline, a further parallel line.
Finding a channel allows you to understand how the price will vary within it (since the price can be approximated as a wave in the channel itself). The second line of the channel identifies the return, on which the price rebounds to return to the trendline.
An important factor is linked to the slope of the trend: the slower the price fluctuation in the channel is, the lower it is inclined.
Operationally, to identify a channel, while prices are forming, you can go and see where prices seem to rebound.
Another interpretation is that if prices go to test the return line (the line parallel to the trend, the upper line in the event of uptrend), then there is a deterioration of the main trend.
Below is an example of the formation of a channel, with consequent breakage, on the XRP chart with a 4h timeframe. The channel was formed, and consequently broken, within 1-2 days.
Image 2 : Tradingview XRP – Channel formation and breaking – Time frame 4h
When a resistance or trend is violated, to be sure not to run into a false signal, we need further confirmation. Operational filters have just this purpose.
A possible filter is the temporal filter , which consists in seeing if the violation of the trend persists for more sessions. A graphic example of this filter is the pullback , which consists in seeing the price that bounces on the resistance or trend just violated, without going beyond it again.
In fact, the pullbacks are rebounds that occur immediately after a support / resistance has been violated.
There is talk of bearish pullback if the rebound is down (for example, a bullish trend-line has broken.) On the contrary, it is called bullish pullback if the rebound is upward.
More trendlines are drawn (eg 3), which start from the same point called the fulcrum. At this point we consider a trend inversion when all the trendlines are violated.
Usually the correction of the main trend can have an amplitude equal to 33, 50% and 66% of the excursion between the absolute maximum and minimum prices recorded in the period under examination.
Below is an example of fanlines:
Image 3: Tradinview XRP – Example of fanlines
It should be noted that the secondary trend, which at the beginning was bullish, retraces several times. The third time it retraces is a sign that the trend has probably changed. As we can see later the price goes down and a long horizontal phase begins.
The breakout of a trend means, in this case, the change of a bearish to bearish trend.So not the simple overcoming of a support / resistance.
To identify the breakout of a trend, two operating techniques are:
- The break of 3 successive fanlines;
- The increase in frequency of the waves (which therefore become narrower)
To confirm a breakout, make sure that the excess is clear and that prices do not come back.
One possible operating strategy is the sale / purchase in installments (es 3).
For example, in cases of purchase (known as a scale down purchase), to be done because a resistance has been overcome, a first purchase is made when the price rises beyond resistance. Two further purchases are inserted when the price is resumed.
STOPLOSS / STOPBUY
A stoploss is nothing more than a sales order that is activated when the price falls below a certain threshold. In contrast there is also the stopbuy, which is a purchase order that is activated when the price rises above a certain threshold.
These two types of orders mainly serve to limit losses in the event of a sudden change in trend.
Regarding the stoploss , in an uptrend, it is better to put them immediately below the trend line.
In a bearish trend should be put immediately above. In the case of cryptocurrencies this translates into a purchase when the upper trendline is exceeded (using special measures such as filters).
- Robert d. Edwards, John Magee, “TECHNICAL ANALYSIS OF STOCK TRENDS”, 8Th edizione del 2001, STL Pag 249 – 276)
- Ettore Coliva, Lucio Galati, “ANALISI TECNICA FINANZIARIA”, 1th edizione del 1992, UTET Libreria (Pag 28 – 58)
- Achille Fornasini, “Mercati finanziari: scelta e gestione di operazioni speculative – I metodi e i sistemi della moderna Analisi Tecnica a supporto delle decisioni operative”, 1th edizione del 1996, ETAS (Pag 13 – 214)