A trend line is a line drawn from the highest prices (price ceilings) or lowest prices (price caps) to show the dominant price direction.
Trend lines show support and resistance at any time point on the price chart.
Trend lines also show the route, price speed and price patterns in different time periods.
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Important Notes:
- A single trend line can be applied to a chart to get a clearer picture of the trend and price direction.
- Trend lines can be applied to price floors and ceilings to create a channel.
- The time period analyzed and the exact points used to draw the trend line are different for each trader.
What do trend lines tell you?
The trend line is one of the most important tools used in technical analysis.
Instead of looking at the past performance of the business or any other basis, technical analysts look for trends in price action. The trend line helps technical analysts determine the current direction of market prices. Technical analysts believe that the trend is like your friend, and determining this trend is the first step in the process of making a good deal.
To create a trend line, the analyst must have at least two dots on the price chart.
Some analysts like to use different time intervals, such as one minute or five minutes. Some analysts consider daily or weekly charts.
Some analysts set aside time altogether and prefer to look at trends at tick intervals rather than at intervals.
What makes the use of trend lines attractive and pervasive is that these lines can be used to identify trends, regardless of interval, framework, and time interval.
If a company’s stock trades at $ 350 and then moves to $ 400 in a few days and to $ 450 in a few weeks, the analyst will have three points to chart, starting at $ 350 and then moving to $ 400. It starts at $ 450.
If the analyst draws a line between these three price points, this line will have an uptrend. The drawn trend line has a positive slope and therefore tells the analyst that he should buy according to the trend path.
However, if the company’s stock price rises from $ 350 to $ 250, the trend line will have a negative slope and the analyst should follow the direction of the sell trend.
The general structure of the trend line
Trend lines are obtained by connecting the lowest or highest price points in the chart.
A downtrend line is obtained by attaching price ceilings and an uptrend line is obtained by attaching price ceilings.
What are trend lines?
Real examples of trend lines
Using trend lines is relatively easy.
The trader should only have a price chart (including opening, closing, highest and lowest prices) on the chart. Today, technical analysis software displays charts in different types (candlestick charts, bar charts, bar charts, etc.).
What are trend lines?
This line shows the trend of the stock ascending and that line can be considered as a support level.
In this case, the trader may prefer to move close to the buy line and maintain this trading position for a long time.
If the price performance breaks the price line and goes down, the trader can consider it as a signal to close the position (ie sell). This allows the trader to trade according to the trend and exit the buy trade when the trend he is following begins to weaken.
Trend lines, of course, depend a lot on time. In the example above, the trader does not need to draw the trend line continuously and repeatedly. However, on a minute scale, different trend lines may be drawn and trades may need to be reset.
The chart below shows the downtrend line in Pars Khodro stock chart:
What are trend lines?
The difference between trend lines and channels
More than one trend line can be applied to a chart.
Traders usually draw a trend line to connect high prices as well as a trend line to connect low prices to create a channel. The channel can specify both support and resistance for the period under review.
Similar to the single trend line, traders are looking for a sudden rise or fall in price or failure so that when the price goes out of the channel, it trades in proportion to the direction in which the price moves. The breaking point of the channel can be used as an exit point or entry point.
Trend line restrictions
Trend lines have similar limitations to other technical analysis tools.
As more price data is added to the chart, trend lines also need to be reset.
A trend line sometimes lasts for a long time and the price will be far enough away from it and therefore needs to be updated. In addition, traders often choose different data points to connect to.
The trend line drawn by one trader may be viewed differently by other traders.
For example, some traders use price caps over a period of time, while others may use the lowest closing price over a period of time.
The bottom line is that trend lines applied to smaller time frames can be volume sensitive. A trend line during which there is a low price volume may be easily broken whenever the volume rises during a trading period.
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