Master trend line drawing to identify trading opportunities from support and resistance levels

In the world of technical analysis, every trader has their own toolbox. Some are obsessed with various technical indicators, some only look at candlestick patterns, while I personally rely more on trend lines to guide trading directions. So, what are trend lines? What are the differences in their drawing methods? How can they be used to identify buy and sell opportunities? This article will provide a detailed analysis of the definition, drawing techniques, and practical applications of trend lines, and also recommend several high-quality drawing and trading software.

Understanding the Core Concept of Trend Lines

A trend line is essentially a straight line connecting high points or low points of prices, used to determine the direction of a financial asset’s movement.

This is a reference line drawn subjectively on a chart by analysts. By connecting extreme points (highest or lowest) within a certain time frame, we can judge whether the market is in an uptrend, downtrend, or sideways consolidation.

The core functions of trend lines are:

• Identifying the rhythm and cadence of price movements
• Discovering naturally formed support and resistance levels
• Finding reasonable entry and exit points
• Warning of potential trend reversals

For example, in practical trading, during a clear uptrend, when candlesticks retrace to the trend line support level, it is an ideal point to add positions; conversely, when reaching resistance levels, it is a consideration for closing or exiting. In a downtrend, resistance levels are opportunities for short entries, and support levels are reference points for stop-loss. Once the price strongly breaks through the trend line, it often signals a trend change or acceleration, and traders should be alert to changing circumstances.

Methods for Drawing Uptrend and Downtrend Lines

Uptrend Line: Connecting progressively higher lows

An uptrend line is formed by connecting two or more successive higher lows, where each low must be higher than the previous one. This line shows an orderly upward push in price during an ascent.

Specifically, when the price is in an up phase, we connect the lowest points of each retracement (at least two) to sketch an uptrend line. If the lows continue to rise, forming a rhythmic upward movement, then these lows can be clearly connected to form an uptrend line.

For example, on the GBPUSD four-hour chart from March 1 to March 27, 2018, starting from the upward move on March 1 during the European session, and rising again on March 9, we observe two continuously rising lows. From this, a clear uptrend line can be drawn. Later, when the price retraced near this line on March 16, it still found support and continued upward.

An uptrend line is essentially built from multiple support levels stacked layer by layer, reflecting gradually strengthening demand and a stair-step rise in price. As long as the asset price remains above the trend line, the uptrend remains stable. But once the price breaks below this line, it indicates weakening demand and an increased likelihood of trend reversal.

Downtrend Line: Connecting progressively lower highs

Contrary to the uptrend line, a downtrend line is formed by connecting two or more successive lower highs, where each high must be lower than the previous one. This line indicates a rhythmic downward push in price during a decline.

In other words, during a sustained decline, connecting the highest points of each rebound (two or more) creates a downtrend line. If the price’s highs continue to decline, showing a regular downward pattern, these highs can be connected to form a downtrend line.

Looking at GBPUSD from January 25 to February 27, 2018, on the four-hour chart, starting from the decline on January 25 during the US session, and continuing through the downtrend on February 2, the highs kept decreasing. From these, a downtrend line can be drawn connecting more than two highs. Later, on February 16 and 26, when the price retraced near this line, it faced clear resistance and continued downward.

A downtrend line is a collection of multiple resistance levels, representing increased market supply and a stepwise decline in price. As long as the price stays below the trend line, the downtrend remains stable. When the price breaks above the trend line, it indicates reduced supply and a possible trend reversal.

Using Trend Lines to Capture Reversal Signals

Transition from Bearish to Bullish

Reviewing the GBPUSD four-hour trend, it initially showed clear bearish characteristics, with the price retracing to the downtrend line and being pulled down by bearish forces. The key reversal signal appeared on March 13 (marked with a yellow box in the chart), when the price strongly broke above the downtrend line, officially signaling the end of the bearish trend. Subsequently, during the retracement on March 16, the previous downtrend line turned into support, and a bullish trend was officially initiated.

Thus, in a deeply entrenched bearish trend, once the price strongly breaks through the downtrend line, the bearish logic must be revised immediately, as the bearish pattern has evolved into a bullish one.

Transition from Bullish to Bearish

Similarly, taking GBPUSD on the four-hour chart, there was a very obvious bullish trend earlier. Each retracement to the uptrend line area was supported by bulls and continued upward. The reversal signal appeared on September 21 (marked with a yellow box), when GBPUSD closed with a large bearish candle and broke below the uptrend line. When the price retraced to the original trend line on September 26, the line’s role shifted to resistance, and a full bearish trend began.

This indicates that in a strong bullish trend, once the price breaks below the uptrend line with significant force, the bullish stance must be adjusted, as the bullish trend has turned into a bearish one.

Practical Trading Techniques Using Trend Lines

Trading Strategies for Uptrend Lines

Looking at EURUSD on the four-hour chart during an uptrend from February 25, 2020, we can clearly see how the trend line functions. On February 26 during the European session, bullish capital entered, accelerating the rise, and the successive higher lows naturally outlined an uptrend line.

On February 28 during the Asian session, the retracement touched the trend line and was supported, bouncing back; on March 4 during the US session, the price approached the line again, and after a surge of buying on March 5, EURUSD continued upward (marked with a yellow box).

Practical tip: In an uptrend, the trend line’s position acts as a natural support level and a potential trap for short entries. Traders can confirm with other technical indicators and establish or add to long positions when the price touches the trend line support.

Trading Strategies for Downtrend Lines

Now, looking at EURUSD during a downtrend on the four-hour chart, starting from the bearish pressure on March 9, 2020, through consecutive bearish impacts on March 11 and 12, with heavy short positions entering, EURUSD closed with continuous downward candles during the European session, forming the second wave of decline and establishing the downtrend line.

On March 13 during the US session, a retracement occurred, but on March 16 and 17, the price was still resisted by the downtrend line (marked with a yellow box), and bears regained strength, pushing EURUSD lower.

Practical tip: In a downtrend, the trend line acts as a natural resistance level and a potential entry point for shorts. Traders can establish or add to short positions when the price hits the trend line resistance, confirming with other signals.

Trend Channels: Price Corridors with Parallel Lines

A trend channel consists of two parallel trend lines, helping traders more precisely identify the asset’s price movement corridor and recognize breakout or reversal signals.

Features and Applications of an Upward Channel

An upward channel is formed by an upper boundary (resistance line) and a lower boundary (support line), both parallel and trending upward. In other words, it is a band formed by higher highs and higher lows.

As long as the price fluctuates within the channel, the uptrend remains intact. The trading logic should be: when the asset price touches the upper boundary of the channel, consider placing a sell order to reduce positions; when it approaches the lower boundary, consider buying to add positions. If the price breaks above the upper boundary, it often indicates further acceleration of the rally, and traders may consider buying further, preferably confirmed by other technical indicators. Conversely, if the price falls below the lower boundary, it suggests weakening demand and a potential trend reversal. If the price cannot reach the upper boundary for a long time, it may imply the upward momentum is waning.

Features and Applications of a Downward Channel

A downward channel is the opposite of an upward channel, formed by a downward-sloping upper boundary (resistance line) and a lower boundary (support line), both parallel and trending downward. It is formed by lower highs and lower lows, helping traders accurately identify optimal support and resistance levels for buying and selling.

As long as the price fluctuates within the downward channel, the downtrend remains valid. If the price fails to reach the support levels within the channel for a prolonged period, it may indicate the decline is exhausted or reversing. In a downward channel, traders can sell when the price reaches the upper resistance line; buy when it hits the lower support line. Additionally, if the price breaks above the upper resistance line, it may signal a trend reversal to bullish; if it breaks below the support, the downward trend may continue.

High-Quality Software Tools for Drawing Trend Lines

TradingView Platform

TradingView is one of the most professional web-based candlestick chart platforms, widely supported globally. Besides offering advanced charting features, it integrates drawing tools, annotation functions, and price alert mechanisms, allowing users to intuitively draw various technical lines. All charts shown in this article are screenshots from TradingView.

MetaTrader Series Platforms

MetaTrader 4 and MetaTrader 5, developed by MetaQuotes Software, are professional trading platforms tailored for financial institutions. They come with rich trading execution functions, unlimited chart libraries, numerous technical indicators and curve tools, and support custom indicators and scripting. The biggest advantage is that traders can analyze charts and execute trades simultaneously without switching platforms. These two platforms cover forex, CFDs, stocks, and futures markets.