Charts & technicals
What are trendlines and how do you draw them?
A trendline connects a series of rising lows or falling highs, giving you a level that moves with time instead of sitting at a fixed price. It is useful for one thing: making the rate of a trend visible, so a change in that rate is something you can see rather than feel. It is also the single easiest tool to fool yourself with.
How to draw one
- Uptrend: connect at least two higher lows, extended right. Downtrend: at least two lower highs.
- Three touches before you take it seriously. Two points define a line through any two points on any chart.
- Use bodies or wicks consistently. Switching between them to make a line fit is the tell that you are drawing the conclusion you wanted.
- If you have to angle it awkwardly to touch everything, there is no trendline there.
The bias to watch for
Any chart contains a trendline that supports whatever you already believe. This is not a flaw in the tool, it is a property of drawing lines on noisy data. The defence is to draw the line before you have a position, and to decide in advance what a break of it would mean.
What a break actually tells you
That the rate of the move has changed, not that the direction has. Trends frequently break a steep trendline and continue at a shallower angle. Treating every trendline break as a reversal is how traders exit good positions early and then re-enter worse ones.
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