A trendline is a line that connects two or more points (prices) in a chart. If it connects two or more higher lows, it is an uptrend line; if it connects lower highs, it is a downtrend. The slope is an indication of the speed of price action or how strong is the current trend. A very steep line suggests that price is either rising or falling quickly and the move might not be sustainable over time, but is strong at the moment.
Why should a trader use trendlines? They help understand the direction and the stage of an underlying trend, and it could provide entry or exit levels for a trade. It is important for many strategies to determine if we are trading with or against the trend. They can be used in practically any timeframe, from 1-minute to monthly charts.
Technical analysts also use trendlines to identify relevant levels. When the price is above the trendline, the actual level where the line stands is a dynamic support. If the price is below the trendline, this becomes dynamic resistance. Dynamic supports/resistances differ from horizontal ones because the actual levels change as time goes by. When these levels are broken, it might suggest it is time to abandon the position or to enter in the direction of the break.
Additionally, trendlines can be used to draw other patterns in charts, such as channels. A channel is formed by plotting a parallel line to the original trendline. It can be an ascendant channel (uptrend), descendant (downtrend), or sideways (horizontal). The pattern will last as long as prices remain within the channel.
