Trend lines. Another extremely useful tool for technical analysis. Technical analysis
Seriously, just ask any technical trader!
Instead of looking at the past company performance or other fundamentals, technical traders prefer to search for trends as part of their trading strategy. They believe that trend is where the gold is… and they’re not completely wrong!
Identifying the trend is the first step in the process of making a good trade. It’s a good first stepping stone into analysing the stock market and identifying what is happening with the stock you’re after.
But let’s not get ahead of ourselves.
Firstly, let’s discuss what trend lines actually are.
Trend lines can be defined as straight lines that connect two, three or more price points on a stock chart and extend into the future to act as lines of support or resistance.
Trend lines connect significant lows in an uptrend and they connect significant highs in a downtrend, creating dynamic support and resistance levels.
We say dynamic because as time changes, so does the price of the support or resistance.
For instance, if there is an uptrend, the level of support will increase as time goes on. In a downtrend, the level of resistance decreases as time goes on.
Pretty straightforward, right?
An uptrend line is an upwards line that has a positive slope and is formed by connecting two, three or more low points.
The second low point must be higher than the first low point for the line to have a positive slope.
Now, let’s see it on an actual Stock chart.
A downtrend line is a downwards line that has a negative price movement or negative price slope and is formed by connecting two, three or more high exact points.
The second high must be lower than the first high for the line to have a negative slope.
Let’s see what it would look like on an actual Stock chart.
IMPORTANT: Minimum of three points must be connected in order to draw a valid trend line.
Now, let’s see what an uptrend line and a downtrend line look like on an actual stocks market chart.
Okay, so now that you know the technicals, let’s talk more about how you can actually draw trend lines in your trading platform.
It is actually super simple. All you have to do is do your market research, choose the stock or share you want to invest in, find three major tops or bottoms and connect them with a single line.
Ok, that sounds easy, right? So what’s next?
Nothing. That’s it.
Apply market research skills? ✅
Apply trendline skills! ✅
Check you! ✅
It is really that simple.
Now, why don’t you try to draw your own trend line? You can do this on most online trading platforms, including MetaTrader 4 (MT4).
All you need to do is find the Insert menu and click the “Line Studies” toolbar in the terminal. To start drawing a trend line, click on the ‘Trendline’ option and simply drag it through your price chart.
Remember, when you’re drawing trend lines in a downtrend, they must be above the price. When you’re drawing trendlines in an uptrend, they must be below the price.
You got this!
Yes, that’s right. There is another type of trend on top of downtrend and uptrend and it is called a Sideways trend.
So what is a Sideways trend?
A sideways trend is a horizontal price movement that occurs when the forces of supply and demand are nearly equal.
In a sideways trend, the price moves in a narrow band, rather than going upwards or downwards.
Let’s take a look at what it actually looks like!
Can you spot one of them on your chart?
There are three types of trends in the stock market:
And if you ever can’t remember, feel free to download a sneaky little cheat sheet we have prepared for you. You can download it by clicking below.
And remember, it takes a minimum of two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.
And most importantly, do not ever draw trend lines by forcing them to fit the market. Ever.
You know what they say. If it doesn’t fit, you must acquit.