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Trend lines are one of traders’ most basic yet useful technical analysis tools. They help identify overall market trends, support and resistance levels, and potential breakouts or breakdowns.

However, trend lines are only as good as the data used to draw them. Plotting inaccurate trend lines can lead to incorrect analysis and trading decisions.

This article will examine some common errors traders make when constructing trend lines. We’ll look at issues like ignoring price candle tails, arbitrarily drawing angled lines, overlooking time frame context, and more.

 

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1. Using Incomplete Candle Data

One of the most common trend line errors is plotting lines using only a candle’s open and close prices while ignoring the highs and lows. This fails to account for the full range of price action during a period. 

For example, say a daily candle opens at $50, has a high at $55, a low at $48, and closes near $53. If you only draw a line between the open and close, you ignore the $7 price swing during the day. A valid trend line must connect the low and high points to incorporate the full candle range.

To avoid this mistake, always construct trend lines using the candlestick tails. Draw diagonal support lines connecting swing lows and horizontal resistance lines joining swing highs. This creates an authentic trend channel that reflects the true price action.

Expand your knowledge with this write-up: Learn about the ‘Candlesticks’ Chart

 

2. Arbitrarily Drawing Angled Trend Lines

Another common mistake is arbitrarily drawing angled trend lines without anchor points on the chart. 

Traders often eyeball a line that vaguely fits the recent price action instead of precisely connecting specific lows or highs, introducing bias into their analysis.

Valid trend lines must touch at least two definitive swing points on the chart. For example, an uptrend line should connect the lowest lows. The more anchor points touched, the stronger the validity of the line. Avoid arbitrarily placing angled lines without these precise anchor points.

When drawing trend lines, carefully locate at least two significant and noticeable swing points, such as a double bottom or lower low pivot. 

Connect these points to establish a precise diagonal support or resistance level. The resulting trend line will accurately reflect the price action without introducing false bias.

You might also like to read: Understanding the Chaikin Money Flow Indicator

 

3. Forcing Parallel Channel Lines

 

A trading chart with candlestick patterns and three support and resistance lines

 

Some traders make the mistake of trying to force parallel channel lines on a chart rather than letting the market action dictate the trend. 

For example, they may anchor the first trend line properly and then simply draw a parallel line to create a channel. This assumes the market moves in equal swings, which is rarely true.

Avoid arbitrarily forcing them onto the chart unless the price action provides anchor points to create parallel channel lines. Instead of anchoring one line and drawing an exact parallel, allow the highs and lows to determine each independent trend line.

For instance, an initial uptrend line on a 4-hour chart may have anchor points at $10 and $15. But the next low may pivot at $18 instead of precisely $20 to form a parallel channel. 

Connecting these actual swing points creates a valid trend channel rather than an artificial one. Let the market action determine each independent trend line.

 

4. Extending Trend Lines Indefinitely

Some traders mistakenly extend trend lines infinitely forward, expecting the market to respect these levels in the future. However, markets evolve, and price swings often exceed prior ranges. Extending trend lines too far into the future provides little accuracy.

Avoid extending trend lines forward just because they align with recent price action. Only extend lines to incorporate legitimate chart anchor points. 

For example, once a support line is broken, former resistance can become new support. This would provide an anchor point to extend a downtrend line. But avoid projecting trend lines indefinitely based on the hope of future touches.

It’s fine to have some forward projections of potential support and resistance. But weigh them lightly in your analysis relative to established trend lines with confirmed anchor points on the chart. 

No chart-based analysis can predict the future. Adapt your trend lines based on evolving price data instead of blind projections.

Take a look at this article: Selling into Strength vs Selling into Weakness - What is the Difference?

 

5. Ignoring Time Frame Context

 

A red alarm clock and a stack of coins positioned against a trading chart

 

Using trend lines without regard to the time frame context is another common error. A trend line on a 15-minute chart will provide different insights than one on the daily or weekly time frame. 

Carefully consider the time frame when drawing and interpreting any trend lines. Daily lines carry more weight than 15-minute versions. An hourly trend line break may have little effect on the prevailing daily trend channel.

Analyze trend line touches and breaks within the proper time frame context. 

For example, during a daily uptrend, an intraday pullback may break a short-term support line but still hold the longer-term daily line. Keep the time frame background in mind for proper trend line analysis.

Give this article a read: What the Detrended Price Oscillator Tells You

 

In conclusion,

Trend lines can be an invaluable technical analysis tool for traders, but only if appropriately constructed. 

As we’ve seen, traders can make many common errors when drawing trend lines, such as ignoring candle tails, arbitrarily angling lines, forcing parallel channels, extending lines indefinitely, and disregarding time frame context. 

Avoiding these mistakes takes diligence and practice. Mastering sound trend line analysis is achieved over time by repeatedly applying concepts across different charts and asset classes. 

Traders should study examples of both accurate and flawed trend lines to deepen their understanding. There is no substitute for putting in the screen time - draw as many trend lines as possible across stocks, forex, cryptocurrencies, and other tradable markets.

With sustained effort, trend line proficiency can become an edge for market timing and identifying opportunities. 

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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”

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