Identifying trends is often a starting point of the technical analysis journey for many beginners, as it's the most beginner-friendly way to find trading opportunities.

In this article, we'll explain what trendlines are, how support and resistance work and how to spot potential entry points in a market.

What are trendlines?

A trendline is a line connecting two or more price points in a chart. Traders draw this line with the help of various drawing tools offered by almost every trading platform.

For example, here is a wide selection of drawing tools on ThinkTrader, ThinkMarkets' proprietary trading platform.

Support and resistance

Trend lines are used to identify the trend direction of an instrument, and to indicate potential support and resistance.

Both support and resistance represent levels where a price bounces back and starts moving in the opposite direction.

Support and resistance levels

As you can see in the image, resistance is located on top of the price channel. It is called so because that's where the rising price meets resistance and slows down. On the other hand, the support level is located at the bottom of the price channel that's where the falling price is supported and slowed down.

How do support and resistance work?

Price movements and direction depend on market psychology and how many bullish and bearish traders are active on the market at any given time.

When the market has more buyers than sellers and subsequently more buy positions than sell positions, it pushes the price higher toward the resistance level. As it approaches the level, traders that bought at lower levels will realise that the price reversed lower from the same price in the past and take the opportunity to lock-in profits. As there are more sellers than buyers at the resistance level, the price will reverse again, and reach a new resistance level.

There is no set timeframe for identifying the previous price reversal level. It could have happened a few days, weeks or months ago. It is important to note that the more often the price bounced off to the same level in the past, the higher the chances it will happen again. The older the resistance level, the more important it becomes.

If bullish traders overpower bearish, which means more people buying (going long) than selling (going short), the price rises and breaks through the resistance level. This breakthrough is usually caused by some external news on the market, such as a new monetary policy announcement, that can be identified with the help of fundamental analysis.

Once the breakout happens, the role of support/resistance usually flips – resistance becomes support, and if the breakout happens in a downward movement, support becomes resistance.

Resistance level reversed into support level

How to find support and resistance levels

Both support and resistance can be very helpful tools to identify a potential trading opportunity because once a breakout occurs, it may indicate a potential entry point for a position in the same direction.

To identify and draw support and resistance in a chart, you need to find and connect the highs and the lows (also called peaks and troughs) of the same price level. You don’t necessarily need to look for both levels simultaneously – even one of them can be quite insightful.

For example, on the image below, you can see how we identified a level that was both support and resistance during different periods of time.

A valid trend line as both support and resistance.

One more factor to pay attention to is that when the price approaches the support/resistance level or even when it breaks through, it can trigger a lot of hesitation on the market with an equal number of bullish and bearish activities creating sideways price movement.

Once you find such a movement, you can add an additional support or resistance level there that will serve as an extra suggestion for a trading opportunity.

For example, on the image below, you see the same EUR/USD chart with support and resistance levels and an additional support level:

Additional support level in a price chart

Once you are comfortable with drawing support and resistance, you can step up your technical analysis and try to identify trends.

What are trends in trading?

A trend in trading, just like in any other aspect of life, means a general direction of movement or development. When experienced traders talk about trends and trend trading, they imply the direction of price movements of an instrument.

All trends are formed by a succession of highs and lows. To identify one, you need to connect these highs and lows in the same manner you did, drawing support and resistance.

For example, on the image below, we connected the highs of a certain part of the chart with one trendline and the lows with another one. Such formation is called a channel, and the two trendlines essentially serve as support (the lower one) and resistance (the higher one).

How to draw trend lines in a price chart

As you can see, the resistance line doesn’t connect all the available highs, as one of them goes through the line. Keep this thought; we’ll explain what it means further in the article.

Bullish, bearing and sideways trends

The direction of the channel can tell us whether a trend is bullish, bearish or sideways – the only three possible types of trends.

If a trend is upward, it is called bullish. It can also be defined as higher highs and lower lows. A downward trend is considered bearish, as it forms lower highs and lower lows. When highs and lows are not reaching new grounds and moving horizontally instead, a trend is considered sideways.

Bullish, bearish and sideways trends

To confirm whether you have identified the correct trend, you need to wait for at least three price movements and analyse their highs and lows. On the image below, you can see how the price formed a higher high first, then a higher low and then moved past the previously formed high; hence we can consider this trend bullish.

Trend formation

Trends within trends

There are two ways to look at trends. You can zoom in and consider smaller individual price movements, or you can zoom out and take a look at a bigger trend.

Charles H. Dow, a founder and co-founder of multiple financial entities, such as the Dow Jones stock index and The Wall Street Journal, developed the Dow theory, where he identified three types of trends by their size:

Minor trend – day-to-day prices;
Secondary trend – bigger trends;
Primary trend – long-term trends, called bull or bear trends.

On the image below, you can see a graphic representation of such trends:

Primary, secondary and minor trends graphic.

The next image shows a real-life example of all three trends within each other on a EUR/USD chart:

Primary, secondary and minor trends on a price chart

Primary, secondary and minor trends on a price chart

Experienced traders tend to use a combination of different trend sizes to find the best trading opportunities. Some start from a primary trend and move inward – to the secondary one, followed by the minor one, while others do the opposite. If, during this research, breakouts overlap in multiple trend channels, it usually indicates a stronger trading signal.

It can also be useful to switch timeframes to confirm the findings. For example, you can use 1-day candlesticks for primary and secondary trends and 1-hour candlesticks for minor trends identification. There are no set rules; it is up to every trader's individual preference.

Essentially, no matter which trend size you are looking at, from the technical analysis standpoint, they all follow the same logic. Once the price breaks through the support or resistance, it may indicate a trading opportunity. This happens because trends tend to reverse after the breakout.

Price breakout on a chart.

False breakouts

It is important to keep in mind that a breakout doesn't necessarily mean that the trend will reverse. Sometimes false breakouts occur, and after a short movement through a trendline, the price moves back to the channel.

False breakouts on a price chart.

That's why every breakout needs to be studied closely to understand whether the trend is weakening and showing signs of an upcoming reverse. It can be observed when the price stops following the trend's pattern.

For example, in a bearish trend – lower highs and lower lows – the price suddenly forms a higher or equal high and a higher or equal low:

The signs of trend weaking and trend reverse.

If we zoom in on the breakout on our EUR/USD chart, we can see how It works in a real trading environment:

Studying price data to identify false breakout.

As we mentioned previously, to confirm a trend, you need to observe at least three price movements following the pattern.

On the image above, when the price breaks through the resistance level in the upward movement first, the third candle has the same high as the second, which means the trend is weak. Indeed, the price returns to the channel after that, revealing the false breakout.

On the contrary, the second time the price breaks through the same resistance level, the first three candles have higher highs and higher lows, forming a new bullish trend in an upward movement.

However, it's important to keep in mind that any indication of a potential trading opportunity you find is no more than just an indication, and it is never a guaranteed signal. Experienced technical analysts use multiple tools to analyse price charts, compare their findings and confirm the probability of a certain price movement in the future. In our following articles, we will talk about chart patterns and technical indicators to equip you with more technical analysis tools.

Meanwhile, you can practise finding support and resistance levels in a chart with your demo trading account. Identify entry points and see if the price behaves as you predicted in a risk-free trading environment with virtual money.

Technical analysis