Drawing Trendlines

Questions

Why do we draw the trendlines the way we do?

How is a bullish trendline drawn?

How is a bearish trendline drawn?

Can we use continuation patterns to draw a trendline?

Is cutting through candles allowed when drawing a trendline?

Do I always have to draw a trendline?

How are trendlines drawn in over-extension?

Why do we draw the trendlines the way we do?

What is the purpose of drawing a trendline?

• Trendlines can tell us about the trend. A trendline can signal the continuation of a
trend (if respected), a reversal, or a bigger pullback within a higher timeframe (if broken).
Trendlines will help us identify the trend once we learn when and how new imbalances
are created.
• Learn when the dynamics of a chart are changing. By connecting the trendlines, the
way we do, you will know very soon when the dynamics of timeframe X are changing.
This is highly important in a top-down analysis. It will give us a very methodical approach
to multiple timeframe analysis that other trendline techniques don't have.
• Quickly learn if opposing impulsive moves are stronger than previous ones. If the
trend is down and bearish impulses are being created, what would you think if the next
impulse is bullish and stronger than the last bearish impulse? Wouldn't you think the
market dynamics for that timeframe are changing? Exactly. That's the reason why you will
learn to draw the trendlines in a precise way.
• Identifying potential reversals. A trendline break will help us identify new potential
imbalances. This is key to understanding multiple timeframe analysis. We will look at this
in more detail in a further lesson.
• The pullback to a trendline can provide us with trade opportunities. In a clear trend,
the pullback to a trendline can provide us with trade opportunities.

How is a bullish trendline drawn?

The description below explains how to draw a bullish trendline. The same is true for a bearish
trendline but it will be reversed, connecting two peaks.

• Connect the latest two obvious valleys (swing lows) and peaks (swing highs). These
valleys and peaks must be clear and obvious, if they are not, consider them as pauses or
CPs. If they are not clear, basing should be unclear and poor, and removal would be
expected anyway. As you gain more experience by reading price action, you will see
valleys and peaks that you could not see before.
• Each timeframe has its own trendline independent from other timeframes, and this is
where subjectivity comes in different methodologies.
 • Continuation Patterns (CPs) will not be used to connect trendlines.
• Never cut through candles. What does this mean? It means that the trendlines cannot
go through wicks or candlestick bodies. You must connect the latest peaks and/or valleys
meticulously, making sure that you are not cutting through the candles, neither wicks
nor candlestick bodies.

An example of a bullish trendline can be seen on USD/CAD daily chart below. Valley V [1] and
Valley V [2] can be connected once the high of V [2] makes a high higher than [4]. The low of
Valley V [2] always has to be higher than the low of V [1].
The video below explains how to draw bullish and bearish trendlines.
How is a bearish trendline drawn?

• Look for tilted “inverted W shapes”, where the second high of the inverted W [P2] is
slightly lower than the first high [P1].
• Two bearish impulses must be created at [P1] and [P2].
• The low of the second impulse [L2] must be lower than the low of the first impulse [L1].
This happens exactly at the red circle at [L2].
• The high of the second peak at [P2] should not be higher than the high of the first peak
at [P1].
• Once price makes a low lower than [L1], a bearish trendline can connect peaks [P1 and
[P2].
• Always connect the latest two peaks or swing highs, [P1] and [P2].
• When a new peak is printed, we’ll have to adjust the trendline and connect peak [P2]
with new peak [P3] whenever it is created.
An example of a bearish trendline can be seen in the chart below. Peak [1] and [2] are connected
once the low of peak [2] makes a low lower than [4]. The high of peak [2] always has to be lower
than the high of the peak [1].

The video below explains how to draw bullish and bearish trendlines.

Can we use continuation patterns to draw a trendline?

We are not allowed to use continuation patterns when drawing a trendline. They are not the
origin of the impulsive moves, and they continue the underlying trend. We must always use
valleys and peaks.
An image is worth a thousand words. On USD/CAD H4 chart below, we will not use continuation
patterns at [1] and [2] to draw a red trendline, that trendline is invalid. The correct trendline is
the one that connects the last two bullish impulses.
On GBP/USD daily chart below, the bearish trendline is incorrectly drawn, because we cannot
use a continuation pattern as seen at [2] to draw a trendline. Peak [1] is obvious and clear. We
need a second peak that has not happened yet.
Is cutting through candles allowed when drawing a trendline?

No, cutting through candles is not allowed when drawing a trendline. You must respect price
action and must avoid cutting through it. Adjust the trendline is such a way that candlesticks will
be respected.

See the chart below, the red trendline is the correct one since it's not cutting through candles.
Do I always have to draw a trendline?

No, sometimes you won't be able to draw a trendline or you won't need to because it's an all-
time highs or an all-time lows scenario. There are times when you won't be able to draw a
trendline because there has been a very strong move or there are not two valleys or two peaks.
Use the elimination of imbalances to locate a potential imbalance instead.

Don't get obsessed with trendlines, sometimes they just can't be drawn.

How are trendlines drawn in over-extension?

In over-extension with three o more consecutive CPs, the trendlines can be drawn more
aggressively connecting the last three CPs. See an example of a bearish over-
exension on Gold XAUUSD weekly timeframe below.