The Trend Lines





Having already read about support and resistance, with this post we are going to add another building block to our understanding of technical tools.

Trend lines are simple yet powerful tools of technical analysis. An up trendline is a line formed by joining the successive lows formed by a stock while in a uptrend. On the other hand, a down trend line is formed by joining successive highs fomed by a stock in downtrend.

Following figures shows examples of uptrend line and downtrend line:

  

Trendlines in actual charts:


Following are some more examples of trendlines in real life charts




Drawing the Trendline:

All major charting softwares and websites, which we have already discussed in our "Introduction to Charting" post provide option to draw trendlines. In order to draw a trend, first of there should be some confirmed trend i.e. upside or downside movement. To draw a uptrend line there must be atleast two reaction lows on the charts, with the second low higher then the first one and in case of an downtrend the each subsequent high must be lower then the previous high as can be seen in the above examples. 

The more number of times the trendline is tested more significant the trend becomes. 

Trading the Trendlines:

An up trendline can be used to buy while a down trendline is ideal for going short. In uptrend line you can buy the stock each time it comes near the trendline support and make good profits with subsequent rises. 

Breakouts and Breakdowns are possible in case of trendlines as well in the same way as it occurs in case of Support and Resistance. While a breakout from a downtrend line is considered a bullish sign but a breakdown from uptrend line is a bearish move. Have a look at some examples to get a clearer view of it:




Valid Trendline Breakouts:

In order to make sure that a trendline breakout is valid or not, we should not hurry to take postion immediately in any stock we need to check next few days price movement in order to make sure that whether the breakout was genuine or not. But a breakout, either form uptrend or down trend should always be a alarm bell for us. Also, another point worth mentioning here is that we should be mainly concentrating on closing price of the day and not on daily fluctuations. Hence, a breakout or breakdown will be considered valid only if it is on closing basis. Following chart shows example of a false breakout:


Support as Resistance after Breakout

Once a trendline breaks support levels on lower side, the support line starts acting as resistance as can be seen from following charts:


The same will also hold good in for resistance acting as supports.

So, friends that's all in trend lines in order to make most of the above learnings try applying the concepts to as many stocks as possible and slowly and steadily you will master these concepts like a Pro.

Happy Learning 
The Stock King

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annu friend
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March 6, 2015 at 3:41 PM delete

Hi...
In last pic of *support as resistance aftr brkout* if closing price again settles above the resistance say 121.50 as in example then should we consider that uptrend is started once again?

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March 6, 2015 at 4:50 PM delete

yes bro if the price settles above the trend line again that is considered a bullish sign and uptrend is confirmed again..................... u r getting it right

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December 21, 2016 at 7:25 PM delete

Hi, thanks for sharing your knowledge and experience. I'm beginner in share market and as usual and expected losing money. Here for gaining some knowledge and love this blog. Best wishes and regards

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