Trend Line
Quick Definition
A diagonal line drawn across price highs or lows to identify the prevailing trend direction and potential support/resistance.
What Is Trend Line?
A trend line is a straight line drawn on a chart connecting two or more price points, used to identify and confirm the prevailing trend direction. It's one of the most fundamental tools in technical analysis.
Drawing Trend Lines:
Uptrend Line:
- Connect successive higher lows
- Acts as support
- Price bouncing off = trend continuation
- Break below = potential trend reversal
Downtrend Line:
- Connect successive lower highs
- Acts as resistance
- Price rejection = trend continuation
- Break above = potential trend reversal
Trend Line Validity:
- 2 touches: Tentative trend line
- 3+ touches: Confirmed trend line
- More touches = Stronger significance
- Time between touches matters
Trading Applications:
Entry Points:
- Buy at uptrend line support
- Short at downtrend line resistance
- Use limit orders at trend line
Breakout Trading:
- Break of significant trend line signals reversal
- Wait for retest for confirmation
- Volume confirmation important
Stop Loss Placement:
- Below trend line for longs
- Above trend line for shorts
Common Mistakes:
- Forcing trend lines to fit
- Ignoring wicks vs. bodies inconsistency
- Not adjusting for new data
- Trading minor trend line breaks
Types of Trends:
- Primary: Major trend (months to years)
- Secondary: Counter-trend corrections
- Minor: Short-term fluctuations
Trend Line Example
- 1Stock bouncing off uptrend line for 4th time confirms strong support
- 2Break below 6-month uptrend line signals potential reversal
Related Terms
Support Level
A price level where buying pressure typically overcomes selling pressure, preventing further decline.
Resistance Level
A price level where selling pressure typically overcomes buying pressure, preventing further advance.
Moving Average
A calculation that averages a security's price over a specific number of periods, smoothing price data to identify trends.
Breakout
A price movement where a security moves above a resistance level or below a support level on increased volume, often signaling the start of a new trend.
Relative Strength Index (RSI)
A momentum indicator measuring the speed and magnitude of price changes on a 0-100 scale, used to identify overbought or oversold conditions.
Moving Average Convergence Divergence (MACD)
A trend-following momentum indicator showing the relationship between two moving averages of a security's price.
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