A trend line is
formed when you can draw a diagonal line between two or more
price pivot points. They are commonly used to judge entry and
exit investment timing when trading securities.
A trend line is a bounding line for the price movement of a
security. A support trend line is formed when a securities
price decreases and then rebounds at a pivot point that aligns
with at least two previous support pivot points. Similarly a
resistance trend line is formed when a securities price
increases and then rebounds at a pivot point that aligns with
at least two previous resistance pivot points.
Trend lines are a simple and widely used technical analysis
approach to judging entry and exit investment timing. To
establish a trend line historical data, typically presented in
the format of a chart such as the above price chart, is
required. Historically, trend lines have been drawn by hand on
paper charts, but it is now more common to use charting
software that enables trend lines to be drawn on computer
based charts. There are some charting software that will
automatically generate trend lines, however most traders
prefer to draw their own trendlines.
When establishing trend lines it is important to choose a
chart based on a price interval period that aligns with your
trading strategy. Short term traders tend to use charts based
on interval periods, such as 1 minute (i.e. the price of the
security is plotted on the chart every 1 minute), with longer
term traders using price charts based on hourly, daily, weekly
and monthly interval periods.
Trend lines are typically used with price charts, however they
can also be used with a range of technical analysis charts
such as MACD and RSI. Trend lines can be used to identify
positive and negative trending charts, whereby a positive
trending chart forms an upsloping line when the support and
the resistance pivots points are aligned, and a negative
trending chart froms a downsloping line when the support and
resistance pivot points are aligned.
Trend lines are used in many ways by traders. If a stock price
is moving between support and resistance trendlines, then a
basic investment strategy commonly used by traders, is to buy
a stock at support and sell at resistance, then short at
resistance and cover the short at support. The logic behind
this, is that when the price returns to an existing principal
trendline it may be an opportunity to open new positions in
the direction of the trend, in the belief that the trendline
will hold and the trend will continue further. A second way is
that when price action breaks through the principal trendline
of an existing trend, it is evidence that the trend may be
going to fail, and a trader may consider trading in the
opposite direction to the existing trend, or exiting positions
in the direction of the trend. |
