In this article, we will take a closer look at the trends.
The trend is your friend except at the end when it bends.
Defining Trends by Highs and Lows
One of the essential things to do is define a trend. A good way to look at this is through the eyes of a four-year-old. Have a four-year-old look at a chart for you, then ask the child if prices are going higher or lower. The child will typically step back, observe, and give you the correct answer by observing the forest and not the trees.
Standard definition of an uptrend is a succession of higher highs and higher lows.
In similar fashion, a downtrend can be defined as a succession of lower lows and lower highs. A downtrend can be considered intact until a previous reaction high is exceeded.
Trend Lines
Uptrends and downtrends are also often defined in terms of trend lines.
An uptrend line is a line that connects a series of higher lows.
A downtrend line is a line that connects a series of lower highs.
The basic trend line is one of the simplest of the technical tools it’s also one of the most valuable, but only if you know how to draw it and use it.
Usually, traders connecting the peaks of a candle’s shadow or the peak of the candle’s body. Both methods works.
Thomas DeMark’s Trend Line
Thomas DeMark accurately notes that drawing trend lines is a highly arbitrary process. Presented with the same chart, different people will draw different trend lines. Presented with the same chart at different times, even the same person might draw the trend line differently.
It is easy to see the reason for the lack of precision. A trend line is typically intended to connect several relative highs or relative lows. If there are only two such points, the trend line can be drawn precisely. If, however, the trend line is intended to connect three or more points—as is frequently the case—a precise line will exist in only the rare circumstance that the relationship between all the points is strictly linear. In most cases, the trend line that is drawn will exactly touch at most one or two of the relative highs (or lows), while bisecting or missing the other such points. The trend line that provides the best fit is truly in the eye of the beholder.
DeMark recognizes that for a trend line to be defined precisely and unambiguously, it must be based on exactly two points. DeMark also notes that, contrary to convention, trend lines should be drawn from right to left because “recent price activity is more significant than historical movement.”
TD downtrend line. The prevailing downtrend line is defined as the line connecting the most recent relative high and the most recent preceding relative high that is also higher than the most recent relative high.
TD uptrend line. The prevailing uptrend line is defined as the line connecting the most recent relative low and the most recent preceding relative low that is also lower than the most recent relative low.
By basing trend line definitions on the most recent relative highs and relative lows, trend lines will be continually redefined as new relative highs, and relative lows are defined.
Internal Trend Lines
Conventional trend lines are typically drawn to encompass extreme highs and lows. However, an argument can be made that extreme highs and lows are aberrations resulting from emotional excesses in the market and that, as such, these points may be unrepresentative of the dominant trend in the market. An internal trend line does away with the implicit requirement of having to draw trend lines based on extreme price excursions. An internal trend line is a trend line drawn to best approximate the majority of relative highs or relative lows without any special consideration being given to extreme points. In a rough sense, an internal trend line can be considered an approximate best-fit line of relative highs and relative lows. Internal trend lines are a concept that should certainly be explored by the serious chart analyst.
How to define a significance of a trend line ?
A trend line breakout is often the first sign of a reversal in the trend.
The longer the trend line has been intact and the number of times it has been tested – the more significant this trend line is.
The more significant a trend line is, the more you can trust it, and its breakout will be more powerful.
What Constitutes a Valid Breaking of a Trend Line?
Most technicians employ a variety of time and price filters in an attempt to isolate valid trend line penetrations and eliminate wrong signals or “whipsaws.” One example of a price filter is the 3 % penetration criteria, but it doesn’t work in crypto market.
What is more reliable is the time filter. A standard time filter is a two-day rule. In other words, to have a valid breaking of a trend line, prices must close beyond the trend line for two successive days. Many false two-day penetrations happen in the crypto market, especially on small-cap altcoins due to their dependence on bitcoin volatility.
The sharper the trend line slope, the less reliable it is, the more likely it would be broken.