stock charts

Drawing Trendlines

Trading stocks information - General tactics and examples

Trendlines are possibly the most useful and valuable tool in the study of market trends. Trendlines are utilized in chart analysis to determine the slope of the market trend and assist in ascertaining when the trend is changing. For the purposes of this explanation, up trendlines and down trendlines will primarily be used. Up trendlines are drawn under the rising stock chart lows. Upward moving trendlines are drawn under the stock connecting the dips to easily target a possible entry point. Down trendlines are drawn above the declining stock chart peaks. Downward moving trendlines are drawn on top of the stock, connecting rallies to easily target a shorting possibility. Markets rise and fall at a given slope. Trendlines help traders determine the slope of a given stock.

When drawing trendlines, draw the line from:

In a downtrend, the highest high to the highest high PRECEDING THE LOWEST LOW.

In an uptrend, the lowest low to the lowest low PRECEDING THE HIGHEST HIGH.

When drawing valid trendlines, traders should watch for the stock to bounce off it several times. For example, in an uptrend markets will often pull back to the up trendline and bounce off it and make a higher high. Retests of an upward moving trendline often present excellent buying opportunities. In a downtrend, stocks will often rally up toward the falling trendline, presenting traders with short selling opportunities. It is significant when a trendline is touched at least three times and is often followed by a major move.

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Trendlines speak volumes when they are violated, because the breaks signal major changes in the trend’s direction. A break below an advancing trendline is bearish or negative, while a break above a declining trendline is bullish. It is also important to realize that the greater the slope of a given trendline, the less meaningful its break is on the downside. If you have a very steep advancing trendline slope, a break below that trendline may mean a stock is going to move up at a slower rate of advance. It does not usually mean the stock has stopped advancing. This is usually due to the fact that the stock’s prior rate of advance was simply not sustainable and needs to gather momentum to move again. Conversely, the greater the slope of a down trendline, the less meaningful its break is when it moves to the upside. If you have a steep declining trendline slope, a break above the trendline may mean that a stock may move down at a lower rate of decline, but this does not usually indicate that it has stopped declining. The stock's prior rate of decline was simply not sustainable.


Up Trendline


Down Trendline

Minor trendlines have shorter-term timeframes. Major trendlines encompass longer-term timeframes. In any given stock, a trader will be able to draw several minor trendlines within a major trendline. The minor trendline will help identify when and where the trend might change, designating a trading opportunity. The closer a trendline is to being flat or horizontal, the more negative the implications are when it is broken on the downside. The closer to horizontal the trendline is when it’s broken on the upside, the more bullish or positive the implications are. Also important to notice is that the steeper the angle of descent of a declining trendline, the less positive or bullish its implications are when it is overcome. All this means is that the stock is now going to decline at a slower rate of descent.

When drawing trendlines it is important to capture at least 90 to 95% of the prices. If a trader cannot capture 90 to 95% of the prices because a new trend has begun, the trader should begin the trendline one level below in a downward line or one level above in an upward line.

Trendlines, when drawn correctly and combined with other market information, help a trader ascertain when to enter and exit a trade.

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