Trendlines

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Overview

A trendline can be understood as: turning the abstract idea of a “trend” into a visible diagonal line.

• In an uptrend, a trendline is a rising diagonal line connecting multiple lows
• In a downtrend, a trendline is a falling diagonal line connecting multiple highs
• It is both “diagonal support/resistance” and a “speed line” that reflects trend strength

The value of trendlines:

• Let you see at a glance: trend direction, trend speed, and approximate support/resistance zones
• Provide a reference for trend-following trades: look for pullback buys or rebound shorts near the trendline
• Combine with support/resistance, moving averages, patterns, etc., to form a complete technical analysis framework

Also note:

• A trendline is not a mathematical best-fit line, but a “visual summary” of market behavior
• Drawing involves some subjectivity; there is no “single correct” way
• The point of a trendline is to improve your intuitive sense of trend, not to “decide everything with one line”

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Trendline Basics

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Drawing Rules

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1. Choosing the anchor points

Uptrend trendline: connect lows

• Choose clear swing lows (troughs)
• Start by connecting at least two lows to form a rising line
• If a third low again finds support near the line, it suggests the line “matters”

Downtrend trendline: connect highs

• Choose clear swing highs (peaks)
• Start by connecting at least two highs to form a falling line
• If a third high again meets resistance near the line, it suggests the line has “capping power”

Tip: Identify major peaks and troughs first on a higher timeframe (weekly/daily), then drop back to daily/hourly to refine—this helps avoid “connecting everything into chaos.”

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2. Wicks or bodies?

In practice, two common approaches:

• Connect wick extremes (high/low):
  • emphasizes the “outer boundary of emotional extremes”
  • better for observing “the edge of market sentiment”
• Connect bodies (near closes):
  • emphasizes “where most trading concentrates”
  • often more stable and less disturbed by outliers

There’s no absolute right/wrong. A simple rule:

• draw using extremes first, then fine-tune toward where “most pullbacks/rebounds fit better”
• keep a relatively consistent habit—your eye will develop its own standard over time

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3. How many points are needed?

• In theory: two points can draw a line
• In practice: at least three valid touches are needed to call it a “trustworthy trendline”

A common heuristic:

• Point 1 and 2: only an “initial hypothesis that a line may exist”
• The 3rd touch:
  • if price clearly reacts there (bounces/rejects),
  • it serves as validation of the trendline

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Validation Methods

After drawing a trendline, you still need to answer: Is this line reliable?

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1. Number of touches

• Typically require at least 3 valid touches
• Clear reactions at touches (bounce/reject) increase credibility
• If it’s touched too many times, be cautious:
  • support/resistance may be “consumed” repeatedly and eventually fail decisively

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2. Price reaction

Observe:

• Does price move away immediately after touching the line?
  • if each touch triggers a quick reversal, the line “constrains” participants
• Or does price often “grind” around it, crossing back and forth?
  • such a line tends to be weaker, more like a noisy zone

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3. Time span

• Longer-span, higher-timeframe trendlines (e.g., weekly)
  • usually matter more than lines drawn from just a few days of data
• Short-term trendlines can help short-term trades, but offer limited guidance for medium/long-term direction

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4. Volume breakout vs. false breakout

When price breaks a trendline, watch at least two things:

• Volume:
  • a breakout on higher volume (often with fundamental/sentiment drivers) is more likely a “real break”
  • a low-volume break that quickly returns to the original side is often a false break / trap
• Retest confirmation:
  • after a real break, price often retests the trendline (or nearby zone)
  • if the retest holds and price continues in the new direction, the signal is more reliable

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Advanced Applications

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The Fan Principle

The “fan principle” can be understood simply as: as a trend develops, the slope of the trendline changes—one line isn’t enough, so you draw three lines to form a “fan.” Typical approach (uptrend example):

1. First trendline (the gentlest)
   • in the early stage, connect the initial key lows with a more conservative slope
   • as price accelerates, it may climb above this line with a steeper rhythm
2. Second trendline (steeper)
   • when the first trendline is decisively broken but price hasn’t entered a long-term downtrend
   • use the newer lows to draw a steeper rising trendline
   • meaning: the trend persists, but rhythm accelerates or structure changes
3. Third trendline (the steepest)
   • in another acceleration phase, draw an even steeper line from the latest two lows
   • often represents the trend’s “final sprint”

Core use of the fan principle:

• Each break of a fan line indicates bulls weaken by one layer
• If all three trendlines are broken decisively,
  • it often signals the medium-term trend has likely reversed

The same applies to downtrends, with direction flipped:

• a set of descending lines from gentle to steep forms a “downtrend fan”
• each upside break weakens bears by one layer

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The “Magic” Number 3

The number 3 shows up repeatedly in technical analysis, and trendlines are no exception. You can interpret it from several angles:

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1. Three points make a line → trendline confirmation

• two points can draw a line, but it’s only a “hypothesis”
• when the third touch produces a clear reaction:
  • the trendline is validated as a “market-recognized boundary”
  • many systems treat the “third touch” as a primary entry opportunity

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2. Three tests → watch for a break

• When support/resistance (including a trendline) is tested repeatedly but holds:
  • it confirms importance
• But it also implies:
  • each test consumes some defending force
  • at the third or later impacts, be especially alert to a “true break”

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3. Three trendlines → “three-stage weakening” in the fan principle

• first break: deceleration, not necessarily reversal
• second break: structure is clearly weakened
• third break: often means a full-cycle trend on that timeframe has ended

You can treat “3” as a natural threshold from “possible” to “more likely.”

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What the Slope Means

A trendline’s slope reflects the trend’s “speed” and “steepness.”

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1. Too gentle

• A gentle uptrend line (“easy incline”):
  • price rises slowly, pullbacks are mild
  • often driven by short-covering plus steady buying
  • tends to last longer
• A gentle downtrend line:
  • supply is released in an orderly way; panic is low
  • often seen in industries with gradual fundamental deterioration rather than sudden collapse

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2. Moderate slope (a healthy trend)

• Price oscillates relatively steadily around the trendline, neither too fast nor too slow
• Often a normal trend driven by “fundamentals + gradual capital follow-through”
• For trend-followers, this slope is the most tradable:
  • you get pullback opportunities
  • price doesn’t “launch to the sky” in a few days

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3. Too steep (beware acceleration phases)

• A steep angle:
  • consecutive large bullish (or bearish) candles over days/weeks
  • the trendline approaches a “sprint angle”
• For bulls:
  • often the “last frenzy” phase
  • volume surges; media and social platforms focus intensely
• For bears:
  • if it’s a downside acceleration, it may be the “dump + panic selling” late stage

Rule of thumb:

The steeper the trendline, the easier it breaks (or is broken), and the shorter it tends to last.

So:

• when trendlines get steeper, be prepared:
  • don’t keep adding and chasing
  • tighten stops or take partial profits
• when trendlines start to “flatten,” rhythm is slowing—often a transition into sideways/choppy behavior

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Core Concepts

This section can be distilled into a few key points:

1. A trendline is “diagonal support/resistance”
   • it includes both price and time dimensions
   • it expresses the balance boundary between bulls and bears under a given rhythm
2. A trendline is not a precision tool, but part of a decision framework
   • it helps you:
     • establish the rough trend direction
     • identify key dynamic support/resistance zones
   • real decisions still need:
     • volume, patterns, horizontal support/resistance, fundamental changes, etc.
3. Trendlines carry different importance across timeframes
   • weekly/monthly trendlines: for medium/long-term direction
   • daily/hourly trendlines: for swings and short-term tactics
   • a break of a short-term line doesn’t necessarily mean the higher-timeframe trend is over
4. Trendlines are lagging, but they buy confirmation
   • you need two points before you can draw, and a third touch to confirm
   • you won’t catch the exact bottom, but you avoid a lot of “prediction-based random trading”

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Practical Applications

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Case 1: “Third-touch buying” in an uptrend

Scenario (assume daily):

• A high-quality blue-chip rises from 10 to 18
• You draw an uptrend line using two swing lows near 10 and 13
• Price then pulls back from 18 and approaches the trendline again near 15

Practical thinking:

1. This is the third touch of the trendline
2. If near the line you see:
   • hammers, dojis, bullish candles on volume, and other stabilization signals
3. Consider probing buys in tranches and placing stops some distance below the trendline
4. If price continues to rise along the trendline, add selectively or hold

The trendline’s role here:

• it doesn’t tell you “it must rise tomorrow,”
• it gives you a better-value buy zone + a reasonable stop location.

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Case 2: Identifying “trend weakening” via the fan principle

Scenario:

• A sector rallies hard for months
• On the weekly chart, you draw the first (gentler) uptrend line
• As the rally accelerates, you draw a steeper second and third line from later lows
• One week, price breaks below the third (steepest) line on volume
• Soon after, it breaks below the second, and then even the first

Interpretation:

• Bull strength weakens step by step: acceleration → normal advance → loss of the long-term trendline
• The market shifts from an “accelerating uptrend phase” into “top-building or trend reversal”

Action:

• For those who chased in the acceleration phase:
  • start reducing once the second/third line breaks
• For medium-term holders:
  • a break of the first long-term trendline is a strong warning
  • seriously reassess whether to reduce heavily or exit

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Case 3: Combining trendlines with horizontal support/resistance

Scenario:

• A stock has a clear long-term uptrend
• You draw a stable rising trendline as “diagonal support”
• You also see that price has repeatedly bounced near a level (e.g., 20), forming horizontal support

On a pullback:

• price approaches both:
  • the rising trendline
  • the 20 horizontal support
• and volume expands, with a long lower wick candle

At this point:

• diagonal support + horizontal support + high-volume long lower wick all stack together
• This confluence is more informative than any single signal
• It’s more suitable as a zone to probe buys/add (assuming no major fundamental negative shift)

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Common Questions

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Q1: Trendlines often get “poked through and then recover”—is it broken or not?

This happens frequently. Key points:

1. Treat trendlines as zones, not single absolute prices
2. Focus on the close, not just intraday prints:
   • intraday break but close back above → often a false break / shakeout
   • multiple closes on the other side → more likely a valid break
3. Combine with volume:
   • low-volume “poke” → lower credibility
   • high-volume consecutive breaks → more meaningful

A simple rule you can adopt:

Only treat it as a real trendline failure when “the close stays on the other side for 1–2 candles + volume confirms.”

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Q2: Different people draw different trendlines—whose should I trust?

This is the “subjectivity” issue.

• The key isn’t “who is more accurate,” but whether:
  • your method is stable and consistent
  • you pair it with clear rules (entries/exits + risk control)

Practical suggestions:

1. Standardize your own drawing habits:
   • prioritize obvious swing highs/lows
   • focus on key daily/weekly points
2. Don’t chase “perfectly fitting every extreme point”
3. Treat trendlines as auxiliary tools, not the sole basis of every decision

If you keep reviewing charts under one consistent rule set, your trendlines will develop your own “style,” and that matters more than copying someone else.

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Q3: In sideways markets I can’t draw nice trendlines—does that mean I can’t use them?

Yes—trendlines are naturally less useful in ranges.

• Trendlines work best when:
  • there is a clear directional move and a recognizable swing structure
• In sideways / highly choppy markets:
  • highs and lows are messy
  • trendlines get crossed frequently and become “spaghetti lines”

In those conditions, it’s better to:

• use horizontal support/resistance (box boundaries)
• focus on volume-congestion zones and volatility ranges
• wait for a breakout before using trendlines, or trade the range only

In one sentence:

If there’s no trend, don’t force trendlines. Tools must match the market state, not the other way around.

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Summary

• Trendlines are tools for visualizing trend direction and strength, essentially “diagonal support/resistance”:
  • uptrend lines connect troughs
  • downtrend lines connect peaks
• A credible trendline usually requires:
  • at least three valid touches
  • a longer span and higher timeframe relevance
  • clear reactions near the line (bounce/reject)
• The fan principle and the “number 3” help you:
  • read the process of trend “deceleration → weakening → ending” from multiple slopes
  • avoid obsessing over a single line as if it must stay valid forever
• A trendline’s slope reveals:
  • trend speed
  • whether the move has entered an acceleration or exhaustion phase
• In practice, trendlines work best when combined with:
  • horizontal support/resistance
  • volume
  • multi-timeframe analysis
  • fundamental and macro context to truly be effective.

Remember: trendlines help you “see the board,” not play the game for you. What ultimately determines P&L is always your trade plan + position sizing + risk control.

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Further Reading

• Technical Analysis of the Financial Markets — John J. Murphy (John J. Murphy)
  • A systematic introduction to trendlines, channels, the fan principle, and many chart tools—classic technical analysis text
• Trading for a Living — Alexander Elder (Alexander Elder)
  • Chapters on multi-timeframe analysis, trends, and channels are very helpful for practical trendline application
• Japanese Candlestick Charting Techniques — Steve Nison (Steve Nison)
  • Combine candlestick patterns with trendlines to observe bull-bear battles at key levels
• Practice suggestions
  • Pick a few stocks or indices you know well and on daily/weekly charts:
    • manually draw the main trendlines and fan lines
    • mark each “third touch” and what happened after breaks
  • Through repeated review, turn trendlines from “theory” into an intuitive tool in your own eyes.