Drawing Trend Lines

Drawing trendlines
Trend line connecting correction lows

Trend lines are key elements of chart patterns as they indicate significant price levels. Thus an understanding of trend lines, and what they represent are important for successful technical analysis.

In an uptrend, which is characterized by higher highs and lower lows, with the higher lows referred to as correction lows or reaction lows as the market corrects an overbought condition, a trend line can be drawn below the correction lows connecting two or more of the lows. A trend line that connects only two correction lows is a tentative trend line and is only confirmed when the price test the line successfully, i.e., the price touches the line and bounce s of it, for a third time. When a trend line has been identified, it can used to identify potential areas of support for subsequent correction lows. Should the price breaks the trend line, i.e., penetrate or violate the trend line and close below it, then trend could be broken. However, only a lower low will confirm a reversal of the uptrend. In addition, an increase in volume at the break increases the validity of that break while a decrease in volume increases the probability of a false break. Furthermore, the actual drawing of trend lines is more of an art than a science and take a bit of time to get right. As a guideline, drawing the trend lines along areas of congestion rather than at the tips of the spikes is the preferred method for most technical analysts.

The same is true for a downtrend, which are characterized by lower lows and lower highs. The lower highs are referred to as reaction or correction highs as the market attempts to correct oversold conditions. A trend line can be drawn above the trend to connect two or more correction highs. When the trend line connects only two correction highs, it is a tentative trend line and is only confirmed when the price tests the trend line a third time without violating it. These trend lines are potential areas of resistance for subsequent correction highs. When the price penetrates the trend line and close above it, then trend line could be broken but a reversal of the downtrend is only confirmed by a higher high.

The strength or significance of a trend line increases every time the price returned to test the trend line without violating it. In addition, trend lines on charts with longer timeframes have a greater significance than trend lines on charts with shorter timeframes.




Continuation Patterns

Continuation Patterns
Flag Pattern

Continuation patterns indicate that there is a greater probability of the continuation of a trend than a trend reversal.. These patterns are generally formed when the price action enters a consolidation phase during a pre-existing trend. During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable.

Some of the common continuation patterns include the cup and handle pattern, flags and pennants, symmetrical triangles, ascending triangle and desc...

Reversal Patterns

Trend Reversal Patterns
Double Top Pattern

Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the pre-existing trend will start to reverse. These patterns allow you to enter early in the establishment of the new trend and are usually result in very profitable trades.

The common reversal patterns include the double tops and double bottoms, triple tops and triple bottoms, broadening tops and broadening bottoms, ...


Related Concepts:

Channel Lines

Trend Lines
Channel Lines

Trend lines form the basis for channel lines when the price can be seen to bounce off a line parallel to the trend line. The latter is called the channel line and is drawn along the peaks in an uptrend and along the dips or valleys in a downtrend. However, the price must bounce off the channel line at least twice to confirm the channel. The more tests the trend line and channel line survives without being broken, the more significant the channel is considered to be.

However, the trend line, which offers trade entries in the direction of the trend, should always ...


Trading Bands

Trading Bands
Trading Bands

Several indicators that are placed on the price chart and are based on Moving Averages can be used to form trading bands. These bands can be adjusted to contain most of the proce action with the price often moving between the two moving bands, touching one and then the other. These bands can be used to confirm trading signals, and can also indicate overbought and oversold levels. Some bands, such as the Bollinger Bands and the Keltner Channel have a middle line that can act as support or resistance.

The most popular bands are ...


Support and Resistance

Support and Resistance
Support and Resistance

Support and Resistance lines are often confused with trend lines but they are horizontal lines under the lows and above the highs respectively. They indicate where a previous rally met resistance and where a previous decline met support. These are two important levels in terms of trend identification since an uptrend will tend to break previous resistance levels above the market while a down trend will break the previous support levels below the market.

When the support line below the recent minor low in broken in an uptrend, it indicates that ...