How To Draw Proper Trend Line
Drawing trend line is sometime that is very subjective for most traders. From those trading books that are in the market, trend line is drawn by joining 2 or more swing lows or 2 or more swing highs. However the problem lies with there are a lot of swing highs and lows in most chart and which one should you use and which one should you ignore?
This is a topic that is suggested by one of our active newsletter subscriber who is a fellow trader. Therefore I am going to spend some time on this post to go through how you can draw proper trend line.
Basically there are 2 main types of trend line you can draw and they are
1) Common Sense Trend Line: This type of trend line is the most commonly used by traders and it basically makes use of 2 or more swing highs or lows to connect to form the line. Swing lows are formed when there is a candle that has 2 higher candles on its left and right and swing highs are formed when there is a candle that has 2 lower candles on its left and right.
Since there are quite a number of swing highs and lows in a particular chart, you need to be able to prioritise which are the more important ones.
Swing low usually forms a V-shaped pattern while swing high forms an N-shaped pattern. For swing low, the one with more higher candles on its left and right will be more significant than the one with lesser higher candles on its left and right and it works the same for the swing highs except that you should be looking for more lower candles.
When drawing common sense trend line, you will try to connect a few points and the line that has the most points connected will be the line you should be using to trade. The more swing highs or lows you manage to connect to form a trend line, the more powerful it is because there is more time the market is trying to break the line but failed and it will serve as a strong support or resistance.
One more thing to take note, if the trend line is breached by a candle, it will be no longer useful and you need to redraw another new trend line.
2) Tom Demark (TM) Trend Line: This is a trend line that is developed by Tom Demark. The reason why he comes up with this way of drawing trend line is because he finds that when he is communicating with his partner, they are often not drawing the same common sense trend line and it is very frustrating. Therefore he came up with the drawing of a dynamic trend line that will change as the market moves.
When you are drawing Tom Demark (TM) Trend Line, you are only concerned about the most 2 recent swing highs and lows and that is what makes it so dynamic. The trend line created by Tom Demark will shift when a new swing high or a new swing low is formed. With this method of drawing trend line, you will be able to talk to other traders who are using this method of drawing as both of you are always drawing the same line.
Personally I use a mix of these 2 ways of drawing trend line. The common sense trend line sometime serves as a long term trend line for me while the Tom Demark trend line serves as a short term trend line for me and both of them works rather well so far.
Hope that this post on how to draw trend line is useful for you. If you want to find out more about how to draw short term, medium term and long term trend lines and how to trade profitably with them, you can take a look at this book that I have written.
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