How to Trade with Trend Lines: A full guide exemplified by the Good Crypto app

Whether it be the stock market, cryptocurrencies, or anything else that can fluctuate in price and be traded with a chart, we at Good Crypto highly recommend that one starts their trading journey by acquiring a basic understanding of what is a trend line, trendline trading, as well as support and resistance levels.

In this easy-to-digest blog, we’ll provide you with everything you need to know to be able to understand how to read a cryptocurrency chart, how to make a trend line, and support and resistance lines. We’re hopeful that by the end of this piece you’ll feel confident enough to develop your own trend line trading strategy. Once you’re done reading, we suggest you have a look at some of the other useful content on our Good Crypto blog, as it will help you analyze crypto price charts better and trade more profitably.

So, let’s get to it!

How to read crypto charts?

First and foremost, before we dive into understanding trend lines, we need to know what it is that we’re actually looking at when it comes to a cryptocurrency chart. To keep things simple, we’ll look at a Bitcoin chart with a daily time frame via the Good Crypto app:BTC/USDT chart in the Good Crypto app

As you can see, in the middle section of the chart above, we have daily candlesticks which are either green or red, indicating an overall price increase or decrease on a daily, or various other time frames. These candlesticks represent Bitcoin’s price open, high, low, and close.

Towards the bottom of the chart, we are presented with dates and volume bars, which represent the total traded volume on Bitcoin – USD. So, if there are more sellers than buyers, the volume bars and candlesticks will be red. If the opposite is true, they will be green. The right-hand side of any chart shows us the price of Bitcoin.

As you may have noticed, the price of Bitcoin either moves up, down, or ranges (consolidates) in a sideways direction before making a move.

Crypto price charts are typically viewed in 1, 5, 15, 30 minute, 1, 2, 4, 6, 8, 12, and 24-hour intervals. Now that we covered that, let’s move on to the definition of a trend line.

What is a trend line?

In markets, trend lines are simply diagonal lines drawn on charts that interconnect specific points. Thus, making it easier for traders to gain a visual perspective on asset price movements and identify price trends. As opposed to basic support and resistance lines that are horizontal, and which we will cover later in this blog, trend lines either slope positively or negatively.

Therefore, trend lines are either ascending or descending, symbolizing an up or downtrend respectively. We will once again return to our Good Crypto Bitcoin chart and draw a trend line for both an ascending and descending trend.BTC/USDT chart in the Good Crypto app

The image above is a representation of an ascending trend line on a daily time frame. As we can see on the crypto price chart above, Bitcoin has been in a rather strong uptrend since around the second half of December 2020 and is currently maintaining that uptrend after having tested it twice, in February and just recently in April 2021. BTC/USDT chart in the Good Crypto app

In the image price chart above, you can see two lines used to represent a descending trend in Bitcoin’s price. At one point Bitcoin broke its downward sloping trend towards the start of 2020. However, not only Bitcoin, but nearly all global markets soon came crashing down (in March 2020) as the world went on an economic downslide due to the Covid-19 pandemic and global lockdowns. Nonetheless, Bitcoin was able to break free from its downtrend and start its ascent to new highs towards the end of April, effectively breaking out of its downward trendline.

How to draw trend lines?

Trendlines are drawn based on the highs and lows of crypto price charts, connecting two or three candlestick tops and bottoms. An ascending trendline is drawn from a lower to a higher chart position, effectively forming higher lows. Whereas a descending trendline is drawn from a higher to a lower position, therefore showing a lower high. The key difference between drawing a trendline is the choice of points used.

Most technical analysts, however, would argue that in order for a trend to truly be valid and have maximum certainty as to what does a trendline show, it should connect or tap using three or more points. BTC/USDT chart in the Good Crypto app

In the chart image above, we have an ascending trendline that had its start on October 19th. As you can see, the trendline is connected by 4 points. In addition to that, it is accompanied by increasing trade volume, making it quite an ideal upward trend definition.BTC/USDT chart in the Good Crypto app

The above chart shows a descending trend line applied to Bitcoin – USD on a weekly timeframe. As you can see, trading with trend lines only and having a developed eye for charts can lead one to make secure and wise trading decisions.

What do trendlines demonstrate?

Being amongst the most important yet basic tools utilized by traders, trend lines can be used to easily see where the price of an asset continues to challenge the dominating ascending or descending price trend. A trend line will continue to remain valid until it is broken or further confirmed by the price of the asset to which it is applied.

Therefore, in terms of what does a trend line tell you, it’s the strength of buyers vs sellers in a market and can be used to gauge the supply and demand for a specific asset as well as gain an understanding of support and resistance. As mentioned above, a trendline is typically considered valid and best defined if it connects three points.

This leads to the understanding that the more a trendline is tested by price, the more valid it is. Thus, trendlines are used in technical analysis as a way to understand the current direction of market prices and help create a forecast of future price movements and velocity.

How to calculate the trend line?

It’s important to understand that drawing a trendline that connects every point without any slight deviation isn’t exactly necessary. In nearly all instances, a close approximation of a trend line will get the job done for most traders. If you can at least draw a trend line connecting candlesticks and price points, you’ll be quite set.

However, trend line math is a thing, and there is an equation that can be used to calculate a trendline. Follow this link if you would like to use a linear trendline equation calculator.

Support and resistance basics

Now that we’ve covered a substantial amount of information on trendlines, it’s time to dive into support and resistance levels, which just like trend lines, are one of the most fundamental aspects of how to read cryptocurrency charts and do technical analysis.

A support line indicates a level at which the price of an asset finds a price floor or protective barrier. In other words, it’s a level where there is a considerable demand build-up by buyers eager to step in. Below is an example of a support level on Bitcoin:BTC/USDT chart in the Good Crypto app

As you can see in the section of Bitcoin’s price chart above, there were 5 taps of $30,000 where buyers stepped in, defended that area, and effectively turned it into a price floor. Sellers were unable to penetrate the buy strength of that level, leading Bitcoin to eventually bounce and resume an uptrend. Now, let’s have a gander at a heavy resistance level. BTC/USDT chart in the Good Crypto app

Here, Bitcoin’s price was in a ranging trend (note, the extremely sharp drop was related to Covid-19 and lockdowns) and buyers made several attempts to penetrate a heavy resistance level at $10,000 established by sellers who were governing the price trend for that time. Typically, the more a resistance level is challenged by buyers, the weaker it becomes. And as we can see, buyers ultimately stepped up their bid power and gained the upper hand on sellers, busting through the $10,000 resistance level, resulting in a resistance-support flip and initiation of a price uptrend.

Support and resistance levels are made use of by traders to pinpoint key areas of interest on a crypto price chart. Keep in mind that market psychology (more on that in a future blog of ours) is definitely a thing and there are many traders that incorporate support and resistance trading into their strategies, meaning that there are many eyes on them. So, these levels naturally and typically bring in greater liquidity. Your ability as a trader to efficiently identify support and resistance levels can provide you with secure and profitable opportunities to enter and exit the market as well as minimize risks.

Many traders like to use moving averages as their go-to support and resistance indicator. A moving average (depicted in white) is a technical analysis indicator that shows the average price of an asset over a specific period of time. Traders use it as a way to determine price momentum, gain trend insights, and view areas of moving support and resistance levels. Below is an example of a 21-day moving average applied to Bitcoin on a daily time frame cryptocurrency chart:BTC/USDT chart in the Good Crypto app

Now that you’ve got a basic understanding of how to draw trend lines and chart support and resistance lines, it’s time to dive into some trading strategies involving these concepts. Just click on the charts to expand them.

Trendline trading strategy in detail

As we can see in Bitcoin’s price chart below, we have an ascending trendline (defined by a thin black line) which reflects a continuous upward price movement that ultimately led Bitcoin to an all-time high in value. However, we can observe that buyer power became exhausted at that time at a high price point of around $64,804, effectively turning it into a level of resistance (defined by a thick black horizontal line).

As we can further see in the chart snippet below, after Bitcoin’s all-time high became a point of resistance. The price dropped and penetrated through our ascending trendline (which also acted as a key level of support), without bouncing. Keep in mind that the time frame of the crypto price chart above is set to 4 hours. Since Bitcoin’s price broke through our ascending trendline, it now needs to find a level of support where buyers would feel ready to step up and bid.

And so they have. Based on the chart below, we can see buyers stepping in and establishing a brief support level at around the $46,600 price point (consider this to be an approximation, price may dip slightly below and bounce slightly above key support and resistance lines). However, the support line failed to hold, turning into a future resistance zone.

Considering that this info blog is purely about trend lines and we assume that you are currently a trader who is trading with trend lines only, a secure trading decision for you, taking into account current price circumstances, would be to enter a long (buy) position in Bitcoin as close as possible to the $46,600 support line and place a stop-loss slightly below it, depicted in the image below.

As you can see, our intelligently placed spot loss would have saved us a pretty chunk of our portfolio.

Now, as we previously mentioned, typically the more times a resistance level is challenged (the same goes for a support level) – the weaker it becomes. Could we assume that Bitcoin will rally through its $64,804 resistance on its second attempt? Yes. But to be secure about our trading, it would be wise to take some profit off the table as price climbs closer to that level. Let’s view one more example of how we would trade this current price action on Bitcoin’s hypothetical rise back to an all time high.

Our goal here would be to get some buy orders as close as possible to the $32,000~ support level, which has seen three bounces (with slight dips below it). Then, moving with caution, and with a stop loss at $30,000 (to be safe and take candlestick wicks into account), we would aim to take profits on our initial buy position as we approach future resistance levels, which are $39,832; $46,000; $50,567; $59,186 and $64,804 (which are hopefully flipped in support levels by Bitcoin bulls!). This is how Technical Analysis trading according to tradelines works.

Here’s how this trade would be placed using the Good Crypto handheld application with an entry at $32,000, stop loss of $30,000 and a take profit on my 1 BTC position at the closest resistance of $39,832🙂The Good Crypto app UI

Summing things up & the Good Crypto trading app

We hope you enjoyed this article and that it gave you valuable insights as to how to read cryptocurrency charts, support and resistance levels, and trading with trend lines only so that you can analyze the market and trade profitably and safely. Should you want to expand on your technical analysis skills, we recommend checking out our other articles on Bollinger bands, and Trailing Stop orders.

But remember, the cryptocurrency market is a challenging one. There’s a multitude of cryptocurrency exchanges, thousands of currencies to monitor, and valuable news to stay on top of. Which is why we created an intuitive and easy-to-use multi-exchange trading application that suits traders of all levels and makes their lives easier.

Good Crypto, an advanced portfolio management and multi-exchange trading app, lets you manage all your exchange accounts on the go, trade with advanced order types on any exchange, and get live prices and notifications on thousands of cryptocurrencies. The app is built to be intuitive and make your life as a trader easier. It’s available on both iOS and Android devices, and there’s also a web version.

Editorial Note: This is a sponsored article. Opinions expressed are solely those of the sponsor and readers should conduct their own due diligence before taking any action based on information presented in this article.