It can be overwhelming when you first start to trade and hear about different types of trend lines. Where do you begin? Should you study the price charts? What about the economic news? What is Bitcoin? Knowing where to begin is the first step you take in trading.
Trading on the market is a great leveller. It separates the good and bad traders. Those traders who know how to identify types of graph trends are often more talented at spotting investment and trading entry points. Especially when compared with those who jump into a trade based on an Elon Musk tweet. Some of the markets where you can trade include:
Commodities (such as gold and silver)
There are dozens of strategies, tools and techniques that professionals use. Even successful part-time traders can spend enough time and resources to understand what drives the market. One of the critical things that professionals use as trading indicators is different types of trend lines. With so many to choose from, we will pick out the five most common. Then, we will explain how you can understand and use them to your advantage.
What Is A Trendline?
With so many graph trends types, we must clearly define a trendline before we go into any detail about the kinds of trend lines you can find on a live trading chart. Trading is a complex process that requires knowledge and experience to be successful.
One of the most critical tools traders use are trendlines, which help them identify potential entry and exit points in the market. Generally, most trend lines consider the price action over a specific period.
Different types of trendlines are varying graphical representations that indicate price movements up and down over a specific period. For example, some traders who use short-term strategies like scalping will zoom in on types of trend lines you’ll find over a 5-minute or 15-minute period.
However, day trading is another group of strategies altogether. One thing they have in common is that they will draw trends in graphs to ascertain an excellent point to enter and exit their trade.
Swing trading is one of the most common methods beginner traders use. Mainly as it is easier to understand and gives you a good idea of where to draw basic types of trend lines. These will be the first types of trend lines we will explore today.
What Is A Linear Trendline?
A linear graph is one of the clearest trend lines to commit to memory. It takes shape as on the chart below. Although there may be some slight dips in the price of an asset, if the overall price is gradually moving upwards over a certain period, this will constitute a linear trend line, as shown below.
The linear trend equation is as follows:
y = mx + b
X is the independent variable, y is the dependent variable, m is the slope of the line, and b is the y-intercept. You may hear traders talk about other patterns, such as triangle or head and shoulders patterns. Our insights page provides more information. However, it is best to learn the basics first, especially if you are a novice trader.
What Is A Exponential Trend Line?
One of the most commonly used types of trend lines is the exponential trendline. This type of graph is used to identify when a stock or other asset is likely to continue its current trend.
You can use exponential trendlines in short-term strategies, such as reversal trading and long-term trading strategies, many of which you can find in stock trading. Although there are other factors to consider when it comes to trading, these trend lines are solid indicators when combined with external factors such as a stable or positive overall economic sentiment.
As you can see in the above graph, the price of Bitcoin experienced exponential growth during the 2021 bull run. This was a period when many cryptocurrency companies capitalised on the considerable increase in the sector. This is one of the types of trend lines that deviates away from a linear trend line and accelerates in a specific direction.
What Is A Logarithmic Trendline?
The trend line equation for a logarithmic trendline is:
Y = m1*ln(X) + C
This may seem like a complex equation, and trend line definition math can be complicated. Therefore, we will show you a graph.
As you can see above, a logarithmic trendline is when a price experiences a sharp burst and then stagnates at that level for a considerable period. If there’s a negative linear trend at any stage, it invalidates this type of chart. You will often see logarithmic trendlines during an economic boom, such as the current situation in Guyana with their GDP.
What Is A Polynomial Trendline?
You can use a polynomial trendline when your data values fluctuate up and down. It is one of the trend lines you will often find in cryptocurrency due to its volatility, especially regarding specific strategies such as day trading.
The polynomial trendline equation is y=a+x(n) with the values:
x=the explanatory variable
n=the multiplier of the polynomial (e.g. squared, cubed, etc.)
The shape of a polynomial trendline is shown below in this image:
As long as you have a large enough amount of information, the polynomial trend line graph is one of the types of trend lines that is often the most used. It is one of the line graph curves you can find many professionals using.
What Is A Power Trendline?
A power trend line is one of the types of trend lines that you can’t use if your information has zero or negative amounts. However, this is one of the most prominent types of trend lines that traders and analysts will use during a bull run. The equation is similar to the polynomial trend equation, as shown below:
Y = m1*X(m2)
Although it may look similar to the linear graph, it is comprised in a completely different way. You can see an example of a power trendline below.
We have only touched the tip of the iceberg today regarding types of trend lines. As a beginner, it is essential to familiarise yourself with chart analysis.
You do not need to imprint the formulas into your head. So long as you know the shape they take on a chart, this is the main component. We appreciate that these formulas are complicated, especially if you are not proficient in math. However, being able to develop a basic understanding is critical. As long as you know what to look for, you can build your knowledge about chart analysis and the types of trend lines you can identify.