In this piece I'm going to shed some light on the most basic, and yet, most overlooked TA tool to exist in chart analysis, the Trend Line. A trend line is a simple way to plot the price path of any asset. By connecting a set of lows or highs you can see the general direction the price of an asset is moving.
Looking at the daily chart of Bitcoin we can see the bear market of 2018. By simply connecting the two first definable peaks (Beginning of March and May), we plot a line that dictates the price movement for the rest of the year. On multiple occasions, the trend line rejected the price and simply shorting off this trend line would have reaped huge profits. Most interestingly, however, is what happened at the beginning of April 2019. For the first time in over a year the price started trading above the trend line for a few days, what followed was an explosive rally of more than 25% in a single day. I remember clearly when this happened everyone was stabbing in the dark for reasons why Bitcoin was rallying. All kinds of Eliot wave theories and Fibonacci fans were being plotted and people were citing irrelevant news as the catalyst behind the rally. However, once again the teachings of Occam's razor had me looking at the simple violation of the downtrend line.
Trend lines are not only a dominant force on long term charts. Let's look at the BTC 4 hour chart.
If we plot a line with the two peaks from June 26 and July 10 respectively, we get a trend line. Then in early August as the price was moving up, where do you think we would run into resistance? Precisely on the predetermined trend line. Not a coincidence.
Next, let's look at an even shorter time frame, the 1 hour BTC chart.
From July 30 - August 9 the price rode a trend line that could be plotted within the first few days. Then on August 10th we started trading beneath the trend line, what followed was a swift 20% correction.
Now let's look at the 5 min chart of the current price movement.
The two lows on August 15th and 16th can be used to plot and uptrend line, and look what follows....
The longer you look, the more of these examples of this you can find, on almost any time frame with almost any asset. Markets are driven mostly by human psychology and that is why these trend lines are so dominant. They can help to identify the most optimal point to enter an up or down trend, predict tops and bottoms of short term rallies, and be an accurate gauge of market conditions.
Looking at the daily chart of Bitcoin we can see the bear market of 2018. By simply connecting the two first definable peaks (Beginning of March and May), we plot a line that dictates the price movement for the rest of the year. On multiple occasions, the trend line rejected the price and simply shorting off this trend line would have reaped huge profits. Most interestingly, however, is what happened at the beginning of April 2019. For the first time in over a year the price started trading above the trend line for a few days, what followed was an explosive rally of more than 25% in a single day. I remember clearly when this happened everyone was stabbing in the dark for reasons why Bitcoin was rallying. All kinds of Eliot wave theories and Fibonacci fans were being plotted and people were citing irrelevant news as the catalyst behind the rally. However, once again the teachings of Occam's razor had me looking at the simple violation of the downtrend line.
Trend lines are not only a dominant force on long term charts. Let's look at the BTC 4 hour chart.
Next, let's look at an even shorter time frame, the 1 hour BTC chart.
Now let's look at the 5 min chart of the current price movement.
The longer you look, the more of these examples of this you can find, on almost any time frame with almost any asset. Markets are driven mostly by human psychology and that is why these trend lines are so dominant. They can help to identify the most optimal point to enter an up or down trend, predict tops and bottoms of short term rallies, and be an accurate gauge of market conditions.