How to Draw Charts: Trend Lines for Beginners

hey everyone this is charting Mandana V chart guys calm and in today's video lesson we're going to be looking at how to draw a trend lines it's a pretty basic concept one of the fundamental concepts of technical analysis and charts but if you were doing it incorrectly it can certainly lead to misinformation and wrong signals so we want to make sure we have it hammered down and then once we have our style developed and we are confident drawing these trend lines we can really do it in our sleep it's kind of like riding a bike it just pops right out at you when you're visually looking at a chart so the outline of the video that we're going to be going over what makes a trend line identifying a trend this is really important even if you're not using technical analysis if you're a fundamental investor you need to know if the overall trend of the stock that you're looking at is going up or down as that's greatly going to depend on whether or not you make profit there's two schools of thought some people use the upper wicks of the candlesticks or the lower wicks and some people use the real bodies personally I use the real bodies and neither is right or wrong it just it's important that you remain consistent and inconsistency obviously we'll give you some wrong signals so we'll look at some examples of the two schools of thought as well as inconsistent trend lines and then last and most important what do trend lines tell us how can we utilize this information to make more profitable trades and investments they're going to tell us potential reversals breakouts and then all these patterns flags pennants channels triangles they are all dependent on being able to draw accurate trend lines and then being able to see clear patterns breaking out or forming are going to give us one step up on the herd so to speak which are not utilizing technical analysis and seeing all of this price action visually in front of us so what makes a trend line the prevailing direction of a trend is composed of either higher lows on an uptrend or lower highs on a downtrend seems like a pretty fundamental basic concept we'll look at some examples of that but in terms of the trendline you obviously need at least two points to be able to draw a trendline but that's not enough in terms of having a valid trendline three touches is the bare minimum needed for it to be valid doesn't mean you can't draw a trendline with only two touches but that just means you don't put too much weight into it being an accurate trendline until you get that there Touch and the more touches you get the more valid the trendline is and the more confidence you can be if you have a trendline that has played out over the past two years and it's touched that trendline 15 times you know that the odds are more likely than not that the next time it comes down to that trendline it will likely hold it again just like it has done many times in the past so let's get into some examples this is a very visually dependent topic so we're going to go over all kinds of examples of everything we just talked about so this is gold on the hourly timeframe and we're going to be looking at what constitutes a downtrend and it's the lower lows lower highs and lower lows so there doesn't always have to be lower lows and we'll look at a couple examples a descending triangle pattern has a horizontal base and then lower highs as the price gets tighter and tighter so we'll look at those examples but lower highs and lower lows is the basic fundamental of what a downtrend is and just think of stairs if you're going up stairs I or lows higher highs and down stairs is the opposite lower highs and lower lows so drawing a trendline this is me using real bodies so I'm picking a point to start that trendline at and picking your point really becomes with practice because if I were to start this trend line up back here it would not be a good trendline because I would only be able to hit one point so let's let's do some examples here if I were to draw the trendline from let's say the highest price that was hit here I would use that real body of the candlestick and I would get that one trendline and when I'm drawing trend lines with the real body of the candlestick I'm ensuring that no candlestick is closing above my downtrend line so you can see this candlestick is poking out above it but the close of that red candlestick is all the way down here I'm making sure that the green candlestick closed right at my resistance line and then the price rejected so I wouldn't want to draw my trendline here just because it hits twice and then the price action is all the way down there I want to be where the action is at so I would choose this as my starting point that top on that bounce attempt and that would make sure to hit as many points as I can on the way down but again I'm just getting tighter and tighter and making sure that no price closes above my downtrend line so if I were to pull it in and and hit this point right here and make my focus right there then I'm seeing that this breakout occurs and this would make it an invalid trendline because obviously the price is not responding to it so I want to give a little bit more wiggle room and again make sure that no hourly candlesticks are closing above my downtrend line I'm closing right on it right below it and then there's that rejection so I've got one two three four touches and then it ended up touching a fifth time down here and actually a sixth time right there before that clear break above it and that is telling us that the Bulls are showing up so every time we rejected another lower low followed through with it now that we have broken this downtrend line that could be a bullish entry signal because we are seeing that the price is no longer rejecting from that level now personally not only is the break of a trendline important I use trend lines as sort of a heads up it's not all out in the bag for the Bulls once that level breaks because I'm I'm all about price action price action is king in my opinion so I'll be looking at these lower highs that are set and these are forming resistance every time we make a bounce attempt and reject that's a new resistance level to be watching so we made a bounce and we rejected from 1202 we made another bounce rejected from 1191 and then another bounce the last one here before the breakout rejected at eleven eighty six so now that the Bulls have gotten in control that alone breaking that trendline could be a buy signal for the more risky traders if someone wanted to be a bit more cautious they would wait for the lower hi pattern to break as well so again this top was at eleven ninety one so once the price breaks 1191 we break the lower hi pattern so not only is the trendline important but so is the previous price action and because that's where we're going to be looking for resistance now that we're on our way back up again so we can even draw an uptrend line here when I'm drawing an uptrend line I'm hitting the bottom of any red candlestick I'm making sure no hourly Candlestick closes below my uptrend line so even though this green candlestick is dipping well below that trendline that's the open of the candlestick that's the close of the candlestick every single close here is above my trend line support so where we find resistance we look back at the downtrend every bounce attempt rejected and formed a new resistance level so I'm seeing a resistance level up here at 12:02 and we are currently at 1194 so that is one of the next levels that I would be looking at there was another little bounce attempt right here that rejected from the downtrend line that level is 1198 so that's going to come first so that's a clear downtrend line let's look at Tesla on the daily timeframe a time frame very strong uptrend so again making sure no candlestick is closing below we have plenty of lower wicks dipping below but as long as the price continues to close above that level at access support so here we are visually i zoom out and say where do I want to start my trend I want to start it start the uptrend line once we have our clear lowest price and we had a little higher low here so we can see once that steep trend started right down at the base is where I choose that first candlestick to go off of and then we touch that level or we touch this trendline one two three four more times than you can count here well I would hope you can count that high but let's call it a dozen plus times so we know that's a very valid trendline and it keeps hitting it and bouncing or consolidating now where we currently stand and we have this trendline support to be watching and we can utilize this information because if we lose this uptrend line that's a potential signal to reverse and look in the opposite direction so like I said earlier at the in the outline losing an uptrend line or lose or breaking a downtrend line is a signal of a potential reversal and can have us looking in the other direction so let's look back at those same trend lines we were just looking at and let's go over the two different schools of thought and again neither is right or wrong it all depends on what resonates with you personally so if we have someone who is prescribing to the upper wix theory on a downtrend we would be looking at someone drawing their start at the upper wick and hitting the upper wicks on the way down making sure no upper wick is poking above their downtrend resistance line so that is where that trend would go and personally why I don't like this is because technical analysis is not an exact science so breaking the downtrend line would be just poking above it and we can see here this candle right before the bounce started broke above it and then pull back fairly significantly so that's a little bit of a fake out and fake outs obviously happen like I said it's not an exact science but I like the real bodies of the candlestick because that makes the Bulls in this scenario prove to me that they have the strength to not only break above but to close the candlestick above that downtrend resistance line so a bullish push and then the Bears stepping back in and knocking the price down wouldn't occur because we would have to be sure that the close was going to come over the downtrend line so with this school of thought you might get a signal a little bit earlier and potentially some of the times that's going to work out and give you greater profit but with greater reward is going to come greater risk with the scenario that potentially the price gets rejected and doesn't close above that downtrend line so again that's the upper wick and personally I'm using the real bodies and making sure that the price has to close above the downtrend resistance line in order for it to be broken so same thing on Tesla let's see where we would draw this trendline if we were using the wicks it would be a lot more wiggle room because of that downtrend line or that down spike right here where that lower wick dipped zoom in so we can get this more clearly so hitting and making sure that no lower wicks are dipping below the price we've got multiple touches here again that gives a lot more wiggle room we could pull back multiple days before we touch this trendline whereas if I am using the real bodies it's a lot tighter and there's a lot less wiggle room so in this scenario we might get an earlier signal because I'm using the real bodies rather than the wicks because there's a lot less wiggle room before we do touch that trendline so again there is no right or wrong answer I suggest playing around with both seeing which you like better I'm not saying I'm right and everybody else is wrong it does it the other way but this is just what has resonated with me over the years as what I find to be more accurate and a more strong signal at looking at a break of trends now the important part about which school of thought we choose is remaining consistent because we don't want to be using upper wicks on some parts of the trendline and real bodies on the other so if I'm starting at the real body here let's draw this downtrend line and then I'm hitting the wick of this next line right here that's not going to be as accurate because I'm starting with the real bodies and then I'm changing to hit the wicks so I want to remain consistent if I'm using real bodies use them the whole way down a lot of times you'll see bias traders or investors and they love to be all over stock too it's and all these forums where they they will shape their trend lines to fit their bias and if you remain consistent you can help eliminate that bias because if someone's saying there's going to be a bullish break and they're going to draw their trendline to hit the real body and then the wick and then show that a break has occurred sooner than it would if they had remained consistent with their style of thought so let's say if they were starting with the upper wick back here they would have to hit this upper wick all the way up here which would be a much softer trendline softer meaning not as steep and it would take a lot longer to make a bullish break now let's say someone wants to be bullish because they already entered their bullish position they would drop it down and hit the real body of the candlestick and say up we already had our breakout the Bulls are in control but if you're hitting the wicks and then you switch to start hitting real bodies that's not consistent and that's just a biased confirmation that you're seeing what you want to see so remaining consistent helps eliminate bias now we're going to get into patterns because very very many patterns are reliant on being able to draw accurate trend lines so when I look at Tesla here on the hourly timeframe I can see we're very clearly in a higher low higher high bullish uptrend and when I look at it on the daily timeframe this is the hourly so on the daily I can see what stands out to me as multiple bull flags and a bull flag occurs when you have a steep break out and then normal healthy consolidation for a brief period of time before continuation to the upside and you can see the consolidation for a couple days so just looking on the daily timeframe I can recognize that that is the pattern but I can zoom in on the hourly timeframe and draw it a bit more accurately so let's look at this potential bull flag and a bull flag is also a channel it's what makes it those bull flag is that is occurring after a breakout has occurred so here I am drawing my downtrend resistance line and I'm making sure that no candlesticks are closing above this downtrend line candlesticks can break above it that's fine but it's touching multiple times a bunch of times here another rejection so I'm seeing start another one 2nd 3rd 4th and then before a bullish break and you can actually get some confirmation a lot of times that your trendline is accurate if after a bull break the price of back tests and holds that level if I were to draw it exactly tight there that's where it would be and you can see let me draw the whole bull flag first we need that bottom channel as well so on the channel I'm hitting the low of the initial consolidation I'm making sure no candlestick closes below it and then we can see the price reject and then bounce and reject and bounce all the while normal healthy consolidation because it's following this big-time break out and you can see once the breakout did occur it back tested and held that previous resistance line as support so not only do I get the confidence that we have a clear parallel channel which represents the bull flag a breakout and then a pullback and a bounce off that level and explosion to the upside confirming another pattern I can draw back here this looks like a bull flag so I want to zoom in and get more detail on the hourly I've got my downtrend resistance line to draw hitting the upper body of that green candlestick no candlesticks closing above it until the breakout and then when I go and draw my downtrend line I say up this is in parallel so that's not a bull flag and it took zooming in to be able to see that because we'll zoom out again and look on the daily daily looks like a bull flag but here I would draw my trendline right there to make sure no candlesticks are closing below we had a lower wick bounce right off of it a couple more touches and then a breakout this is a descending wedge pattern and the difference is a parallel channel with an even space in between as opposed to a tightening range that eventually leads to a clear break and if we zoom out on the daily time frame we don't get that detail we get the multiple days of consolidation with lower wicks Bulls buying the dip and then continuation here very similar three days of pullback bulls buying the lower dip and it takes zooming into the hourly timeframe to see the difference in those two patterns another pattern we're going to look at is bear Flags this is gold on the four-hour chart so I just did those bull Flags and this is the opposite it comes after a dump it's a weak bounce attempt and it leads to continuation to the downside so I can see the stair step pattern lower highs and lower lows so I draw to actually zoom in here a little bit more so we can see more clearly hit the upper real bodies of these candlesticks and then the lows of the red bodies making sure no red bodies close below and again obviously all these patterns are drawn in hindsight and I wanted to get some good examples but if this bounce for playing out I would draw these channels and wait for the clear break and same thing we had a clear bear break and then the Bulls attempted to get back over couldn't do it and then a dump and then we had another bear flag down here parallel channel hitting the real bodies of the candlesticks making sure no red candlesticks close below and that bear break occurred right here on this candlestick and then led to a dump so these patterns are all about drawing trend lines on different time frames being able to recognize the price action constricting ranges leading to downside so recognizing patterns is obviously important but being able to draw the trend lines that allow you to recognize the patterns just as equally as important let's look at a couple more here we're going to look at a pennant and a triangle here we have the biotech sector on the weekly timeframe so as you can tell these patterns are all different time frames all over the place and on the weekly time frame just visually what stands out to me here is a tightening pattern where we have a clear higher low pattern so I know that the Bulls are in a nice uptrend but I see that recently we also have a lower high pattern starting as well so we're in an uptrend but we're seeing some lower highs and I would draw things to see a bit more clearly what's going on so originally we had a nice strong uptrend line here but that had broken so wouldn't want to draw it from there just because the price had gotten below that level so I would draw it a little bit closer and we've got one two there's our third touch so I'm hitting the real body down here on that big drop that broke that other trend line I just drew we're hitting it again and then hitting it a third time and I can see this clear lower high pattern so again I might be playing around draw as much as you want and you can always adjust things so if I were to draw a trendline here that's a valid trendline hitting it multiple times I'm hitting this lower high back here two three times you can see the tightening range very clearly but I can make it even tighter by using the more recent price action and using this recent high highest price we saw on the bounce using that real body of the candlestick and drawing it right there so this is going to give me a break out sooner and let's just compare it to that other trendline again we would have again a valid trendline but it wouldn't give us a we have all this space here this this one that I just drew is tighter and it's going to give us a signal sooner so we bounced off it three times we rejected from it three times this is a very important pattern that's going to break in the next three weeks and that's the other thing that these trend lines and these patterns can give you they can give you time frame I know that this pattern is going to break in three weeks at the latest because there's really just not going to physically be space for the price to remain in this tight channel once these candlesticks begin forming for the next couple of weeks so a break of this channel or this pennant here in one direction or the other it's not a channel it's a pennant with tightening ranges it's going to give a short-term direction whether to be looking bullish and up at these resistance levels again the lower highs act resistant or if it's a bear break the higher lows are going to act as support those levels that we bounced off of so this is a really nice pattern that we're all going to be watching here over the next month on xbi on the weekly timeframe another pattern on nke Nike the daily again very clear higher low pattern I can tell we are recently in an uptrend following a downtrend so let's just you can tell you could spend 10 hours drawing all these trend lines certainly plenty to be practicing with there's a trendline here where we made a bull break so again no candlestick here is closing on the daily chart above my down trendline and you can see how quickly I was just able to throw that up there visually speaking and we made a bull break but we're still dropping oh that trend line must be invalid look exactly where we bounced off of the previous resistance acting out of support and then the trend changed so now we can see an uptrend but I see the price is struggling here I'm looking at the the closes of these candlesticks I'm seeing that these bulls are having a tough time closing over the $54.00 psychological resistance level so I throw my resistance line right there I can see one two couple of rejections just below it three four five rejections from it but I still see those higher higher low patterns so we are in an uptrend but we have a horizontal resistance line and this is a ascending triangle pattern and I would draw a trendline here and say nope that's way too tight can't start it from that point so play around with your starting and end points I would start it from this candlestick now I put it right there making sure Friday didn't close below it we're touching it one two three four times range is getting tighter same thing I know there's going to be a break sometime within the next five to six trading days if we close below the uptrend line we're going to look at all these previous higher lows as support levels and if we close about $54 it's going to be a clear bull break so this is an ascending triangle pattern going off of the uptrend line and a horizontal resistance line so you can find these patterns and these trend lines all over the place and they are really going to open things up for you visually if you are newer to charts and you're looking at charts and it's just a whole bunch of candlesticks and cluttered once you start drawing and practicing and playing around things become a lot more clear and you'll be able to recognize these patterns just by seeing where the line that you would draw like creates for example when we just looked at this and I made that pretend start and I saw that that line wasn't going to fit I could just visually know that that wasn't going to be a valid trendline just because of practice and experience doing it I would know that I need to start it right up there so if it's taking you a long time to draw these trend lines at the start don't let that discourage you because like I said it's riding a bike and the more you do this the more it's going to snap visually for you and if you're a visual learner trend lines are certainly for you so I appreciate you watching this video if you have any questions feel free to ask them hopefully this was I open to some degree and again it's all about practicing from here pull up charts look at all different kinds of trend lines draw those trend lines and then keep an eye on them once the price action resumes and see what the clear break is for xbi we're going to be watching this one very closely over the next few weeks in our chat room and we're going to play the signal which ever it gives us in that direction so thanks again hope you have a great night or day whenever you're watching it see you soon

Channel: TheChartGuys

Views: 367,338

Rating: 4.9259048 out of 5

Keywords: analysis, channel, chart, chart lines, draw, guys, how, how to draw charts, lesson, line, market, patterns, resistance, short, stock, stocks chart trading, support, technical, technical analysis, thechartguys, trade, trend, trend lines, trendlines, triangle, wedge

Id: n8_l_NUKDAc

Length: 22min 52sec (1372 seconds)

Published: Mon Jan 30 2017

Reddit Comments

[u/Shahrazad23]

Awesome