Trend Lines

How Trend Lines are constructed?

To draw a straight line we need at least two points. So a line is drawn by connecting two major swing highs or two major swing lows. If this line offers resistance or support to the next swing high or next swing low, then this line becomes a valid trend line.

So a trendline will have three points.

1. Initiating Point: First point from where the line starts.
2. Confirming Point: Second point which confirms the straight line.
3. Validating Point: Third point which confirms the validity of the trendline.

An up trend is characterized by higher high swing tops and higher high swing bottoms. The lowest points of two consecutive swing bottoms are joined by a straight line and extended towards right.

This will have a slope upwards. So this line is termed as rising trendline. It visually represents the up trend and offers support to the future swing bottoms.

If the next swing bottom takes support on the straight line, then this line becomes a valid up trendline.

A down trend is characterized by lower low swing bottoms and lower low swing tops. The highest points of two consecutive swing tops are joined by a straight line and extended towards right. 

This will have a slope down wards. So this line is termed as falling trendline. It visually represents the down trend and offers resistance to the future swing tops.

If the next swing top takes resistance at this straight line, then this line becomes a valid down trend line.

Observe after confirmation of trend at confirming point, how volume has increased.

If we get two more swing lows above the rising trendline or two more swing highs below the falling trendline, we can redraw the lines. These lines with increased slope represents increased momentum of the trend.

What is the significance of Trend Lines?

These are the basic tools of technical analysis. One can trade based on these trendline breakouts.

These lines represents the trend of the market in a way which is visually appealing. As long as the price remains above the rising line, uptrend will be intact. If the price breaks below the line and closes below the line, the trend changes to down trend trend or side trend.

Similarly as long as the price remains below the falling line, downtrend will be intact. If the price breaks above the line and closes above the line, the trend changes to up trend or side trend.

Once the line is broken support becomes resistance and resistance becomes support.

If the price takes support more number of times on the rising line, up trend is more stronger and if the price hits on the resistance of the sloping line more number of times the down trend is more stronger. 5 hits is more stronger than 3 hits.

Slope of the trend line represents the momentum of the trend. More the slope more the momentum. Less the slope less the momentum. If it is more horizontal the trend is more weak. Change of slope of subsequent trendlines indicates change of momentum.

Trend of higher time frame rules over the trend of lower time frame. If the trend in higher time frame is up then down trend in lower time frame might be a counter trend of up trend and vice versa. So a trade taken in the direction of higher time frame is more profitable.

Observe how once the line is broken support becomes resistance and resistance becomes support; how trend changes from up to down, and down to up.

The line joining two swing bottoms in head and shoulder formation is called 'neck line'.

Trendlines are drawn not only on price charts, but also on indicator charts like MACD or RSI.

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