How to draw a trendline honestly

A trendline is a straight line connecting swing lows in an uptrend or swing highs in a downtrend. It is the single most abused tool on any charting platform. Not because it is useless, but because it is easy to draw a line that fits your opinion and then treat the line as evidence for the opinion. This lesson gives you rules that make a trendline something you can be wrong about.

The honest rules

Connect swing points only. Use the swing lows or highs you identified with your swing rule. Do not connect a swing low to a random candle in the middle of a move because the line "looks better."
Two points make a line; three make a trendline. Any two swing lows can be connected. The line only means something if price has respected it at least once more without you moving it.
Draw it before the third touch, not after. If you draw the line after price has bounced three times, you have found a line that fits the past. The test is whether you would have drawn the same line after only two touches.
Wicks or bodies: pick one and keep it. Some traders draw through wicks, some through closes. Either is defensible. Switching between them to make the line fit is not.
Do not adjust it to keep it alive. When price closes through the line, the line is broken. Redrawing it at a shallower angle so that it still "holds" is how people convince themselves a dead trend is alive.

 Honest uptrend line: drawn from lows 1 and 2, tested at 3

                                      /\
                              /\     /  \
                       /\    /  \   /
                /\    /  \  /    \ /
         /\    /  \  /    \/      3   <- third touch, line confirmed
        /  \  /    \/     ..
       /    \/     .. ..
      /     2  .. ..
     /    .. ..
    /  .. ..
   1 ..

 Dishonest line: redrawn three times to keep "holding"

                        /\
                /\     /  \
         /\    /  \   /    \        original line broken here
        /  \  /    \ /      \    ....
       /    \/      3   ......\ ....  <- redrawn shallower
      /     2   .....          \ ..
     /   ....                   \     <- redrawn again
    / ...                        \
   1

What a trendline actually is

A trendline is a visual summary of "pullbacks are getting bought at roughly this rate." That is all. It is not a wall. There is no order sitting on a diagonal line. Orders sit at prices, and prices are horizontal. When a trendline "holds," what happened is that the pullback ended at a horizontal level that also happened to intersect the line, or that enough traders drew the same line and bought there.

That second reason is real. Popular lines on popular timeframes attract orders because many people see them. But it makes trendlines self-fulfilling only when they are obvious, which brings you back to the honest rules: if your line is one that most people would draw, it may matter. If it takes creativity to draw, nobody else sees it and it will not attract anything.

Key idea: A trendline is a summary of the pace at which pullbacks are being bought (or rallies sold). It works when it is obvious enough that many traders see the same line. Draw it from swing points, confirm it with a third touch, and retire it when price closes through.

Angle matters

A very steep trendline, say 60 degrees or more on a normally scaled chart, describes a move that is accelerating. Those break quickly, because the pace is unsustainable. A very shallow line, under 20 degrees, describes a move that is barely a trend. The lines that last are in the middle. When a steep line breaks, the trend often continues at a shallower angle rather than reversing. Do not read a steep line break as a top; read it as a change of pace.

Also remember from Module 1 that the angle depends on how you have scaled the chart. Stretch the vertical axis and every line steepens. Angles are only comparable within one chart at one scale.

Using the line

The honest uses of a trendline are modest:

Locating pullback zones. In an uptrend, where the line meets a horizontal level is a place to watch for buyers. The horizontal level is doing most of the work; the line adds a bit of confirmation.
Noticing a change of pace. A close below an uptrend line that has held three times is worth noting. It is not a reversal signal by itself. It says the pace of buying has slowed, and you should look at the swing lows to see whether structure is also breaking.
Staying on the right side. If price is above a confirmed uptrend line, do not short. That is the trendline's best use and the one beginners ignore.

What it is not for: predicting a bounce to the penny, or drawing channels on top of channels until the chart is a spiderweb.

A note on channels

A channel is a trendline plus a parallel line on the other side of price. It describes a trend with a consistent width. Channels are fine when they are obvious, with the same honest rules. If you need to shift the parallel line around to make it fit, it is not a channel.

Try it: Take a daily chart with a visible uptrend. Cover the right half of the screen. Using only the first two swing lows, draw the line. Uncover the chart. Did price respect your line, or would you have needed to move it? Repeat on three different charts. Be honest about the score.

Recap

Connect swing points only, and only from the same kind (lows in an uptrend, highs in a downtrend).
Two touches make a candidate; a third touch, without redrawing, confirms it.
Never redraw a line to keep it alive. A close through it means it is broken.
A trendline is a summary of pace, not a wall. Horizontal levels do the real work; the line adds confirmation when obvious.
Steep lines break early and usually mean a change of pace, not a reversal.