Trend Lines

Stocks typically run in channels between two points, the lower serving as support and the upper acting as resistance. When a stock is moving in a consistent upward or downward movement, it is said to be in a trend. The ability to find and identify the price points at which the stock is trading and plot their course is possible by drawing trend lines.

These trend lines are often used to determine proper places in which to enter or exit a transaction. The support trend line can be identified by finding two or more levels of price support and drawing a straight line between them. The resistance line can be found by locating two or more levels of price resistance and drawing a straight line between them. These become the trend lines for a stock and can often be used to forecast the range at which the stock will trade.

Trend lines are most frequently used with a daily chart to show both short-term and long-term trends. They may also be used on intraday charts, which shows the stock's performance while the market is open and can help pinpoint more accurate places to get in or get out of a trade. Just because a trend line is broken, doesn't mean that the trend is broken or that the trend will change, but it should be a red flag that something could possibly occur to change the direction of the trend.

When drawing a line for an uptrend, draw from the lowest low point to the highest low point prior to the highest high on the chart. When drawing a line for a downtrend, draw from the highest high point down to the lowest high point before the lowest low on the chart. It takes two touches to draw a trend line, but three touches are needed to confirm its validity. The more times the price touches the trend line, the more significant it is.

Remember that drawing a trend line is more art than science. Everyone has their own way of drawing them and there is no perfect chart. But once a student learns to master the ability to draw lines, they will be better equipped to find a place for possible reversals and retracements.

Trends are an important part in the process of technical analysis and those who learn to spot them on a stock's price chart will have an advantage. By being able to spot trends as they develop, a trader can enter a trade and ride the trend until it ends, which can sometimes lead to large profitable opportunities. Likewise, the ability to see when a trend ends gives a trader the wherewithal to escape a trade in a timely manner and keep more of their profits.

Trend Lines

Stock Charts