Trendlines

A trend is a trend is a trend. But the question is, will it bend? Will it alter its course thruogh some unseen force, and come to a premature end?

The financial markets can move in two ways – trending, or flat. The trendline is the BASIS of technical analysis. An up trendline is a straight line drawn along successive reaction lows that moves up. A down trendline is a straight line drawn along successive reaction highs that moves down. So how do you draw a trendline? Obviously, to draw any line, there must be two points. For an uptrend to be drawn, there must be two successive lows, the second higher than the first. Draw a line between those two lows, which is now your trendline. But for your trendline to be validated, prices should touch and bounce off the line a third time. Same thing for a downtrend. There must be two successive highs/peaks, the second lower than the first. Draw a line between those two peaks, which is now your trendline. For your downwards trendline to be validated, prices should touch and bounce off the line at least 3 times.

In summary, two points to create a trendline, a third to confirm the line.

How Trendlines can be Used

  1. Once a trendline is drawn, one can assume that the trend will continue at it’s current rate.
  2. Trendlines become a level of support or resistance. A downtrend line becomes resistance once the price moves up and approaches the line. An uptrend line becomes support once the price moves down and approaches the line.

3 Responses to “Trendlines”

  1. Peggy @ One Investment January 9, 2012 at 7:33 pm #

    Thank you, too, for the explanation. It does make sense somehow… it all does go hand in hand with the business cycle: expansion, boom and recession.

  2. SB @ One Cent At A Time January 1, 2012 at 11:10 pm #

    Much like the difference between weather and climate. a patterns in short spanned and a trend in long term.

  3. Jackie January 1, 2012 at 10:24 am #

    Love the quote at the beginning :)

    And thanks for the clear explanation of trendlines….