Trading Lesson >> Trendline
and Trendlines for trading Indian Stock share market
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Trendline and Trendlines for trading Indian Stock
share market
Trendlines are an important tool in technical
analysis for both trend identification and confirmation.
What is a Trendline?
- A trendline is a sloping line that is
drawn between two or more prominent points on a
chart.
- A trendline is a straight line that
connects two or more price points and then extends
into the future to act as a line of support or
resistance.
- A trendline helps identify the trend as
well as potential areas of support and resistance.
- A trendline is a straight line that
connects two prominent peaks or troughs in the price
action of an underlying tradable.
- Trendlines illustrate the direction of
the market movement and provide a primary
consideration in any analysis.
Rising trends are defined by a trendline that
is drawn between two or more troughs (low points) to
identify price support.
Falling trends are defined by trendlines that
are drawn between two or more peaks (high points) to
identify price resistance.
Up Trendline
An up trendline has a positive slope and is formed by
connecting two of more low points. The second low must
be higher than the first for the line to have a positive
slope. Up trendlines act as support and indicate that
net-demand (demand less supply) is increasing even as
the price rises. A rising price combined with increasing
demand is very bullish and shows a strong determination
on the part of the buyers. As long as prices remain
above the trendline, the uptrend is considered solid and
intact. A break below the up trendline indicates that
net-demand has weakened and a change in trend could be
imminent.
Down Trendline
A down trendline has a negative slope and is formed by
connecting two or more high points. The second high must
be lower than the first for the line to have a negative
slope. Down trendlines act as resistance and indicate
that net-supply (supply less demand) is increasing even
as the price declines. A declining price combined with
increasing supply is very bearish and shows the strong
resolve of the sellers. As long as prices remain below
the down trendline, the downtrend is considered solid
and intact. A break above the down trendline indicates
that net-supply is decreasing and a change of trend
could be imminent.
Interpretation
- A principle of technical analysis is that once a
trend has been formed (two or more peaks/troughs
have touched the trendline and reversed direction)
it will remain intact until broken.
- That sounds much more simplistic than it is! The
goal is to analyze the current trend using
trendlines and then either invest with the current
trend until the trendline is broken, or wait for the
trendline to be broken and then invest with the new
(opposite) trend.
- One benefit of trendlines is they help
distinguish emotional decisions ("I think it's time
to sell...") from analytical decisions ("I will hold
until the current rising trendline is broken").
Another benefit of trendlines is that they almost
always keep you on the "right" side of the market.
When using trendlines, it's difficult to hold a
security for very long when prices are falling just
as it's hard to be short when prices are
rising--either way the trendline will be broken.
In analyzing trends on the charts, the most useful
tool is the trendline. One of the biggest mistakes made
by amateurs and professionals alike is inconsistently
defining and drawing the trendline.
The correct or right way to draw a trendline
For an uptrend, draw a line from the lowest
low, up to the highest minor low point preceding the
highest high so that the line does not pass through
prices between the two low points.
For a downtrend, draw a line from the the
highest high point to the lowest minor high point
preceding the lowest low so that the line does not pass
through prices between the two high points.
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