One day you are might be just a regular cryptocurrency holder and the very next day you might be a crypto millionaire or even a billionaire. That is how volatile the crypto trade is. The best way to identify trade in a volatile market is by using technical analysis.
Trend lines are the bread and butter of technical analysis. They give an excellent risk reward ratio. Today in this article, let us discuss how trend lines can be effectively used in crypto trading.
What are trend lines?
Trend lines are diagonal lines that help to identify a past trend and an upcoming trend. The direction of the trend line shows the direction in which crypto prices are moving. When prices are continuously moving upward, then the trend line will be an upward slanted line. We call this the support. Similarly, when prices are moving downward, the trend line will be a downward slanted line. We call it resistance.
Trend lines also give us definite support and resistance levels. With this, you can understand the best time to enter a trade. Trend lines are specific for individual cryptos and their slope changes with changes in parameters. Like the bitcoin trend line will give us an idea of when to enter trading bitcoin to maximize our gains.
Trend lines also give us a breather on where to put our stop losses. You can put your stop loss just below the trend line. When the crypto goes below its support level, the stop loss will activate and get you out of that trade, thus minimizing your losses.
How to draw a trend line in crypto charts?
Drawing trend lines is no rocket science. It takes just a little practice to draw them for effective and productive trade.
In an uptrend line, identify 3 to 4 low points such that they are in successive higher lows. Connect the points and extend the line farther to the right. What you have is an ascending trend line. This line is your support and when the price goes below, the support might show the correction.
Similarly, in a downward trend line, identify 3 to 4 successive lower highs. Connect the points and extend the line further to the right. Now you have a descending trend line. This line will act as your resistance and any trade going above the resistance might show a bull run.
Adjusting trend lines
Prices rarely move uniformly in the long run. When the price breaks above or below the trend line, then you need to adjust your trend line. This calls for the need to adjust the trend line accordingly.
Remember that adjusting trend lines does not mean the trend has changed. Adjusting trend lines means adjusting the rate of acceleration or deceleration of a particular trade.
Crypto trading strategy using trend lines
In a crypto chart, draw an ascending line and observe when crypto is correcting and breaking below that ascending trend line. As the crypto keeps on following a downward trend, you can draw a descending trend line with the help of the lower highs.
With the descending line, you can determine the new support level when a large volume of that crypto is traded and if the support level holds, aim to buy into the trade.
Things to consider before entering a trade
Using trend lines to trade into cryptocurrency might look easy, but you should consider some other factors before committing to a trade.
Before entering a trade, observe the trading volumes. Only enter a trade when the volume increases near the support level. If the volume is falling, but the price is increasing, this might be a false indicator or possibly a bear trap.
● Time frame
The crypto market is very volatile. We recommended giving less weight to trends originating from one minute. Depending on the trend line with a shorter time frame contains fewer data and has a greater possibility to show false positives.
Now you know!
Trend lines are easy to draw, implement, and understand. If you are a beginner, then learning how to use trend lines will be the easiest and most rewarding way possible.