Trend Lines

The overall concept of technical analysis is that a stock price follows a particular trend. Whether it be up, down, or sideways, trend lines help you determine the strength of that trend and where possible reversal points are.

Official Terminology

Trend Line – A straight line that connects at least two price points, which then shows you possible reversal points in the future. At that point, the trend line could turn into possible support or resistance. The more points it hits and longer time frame a trend line spans across the stronger it is and greater significance a breakout means.

It is important to note that a break of a trend line only signals possible end of the current trend. With no real price targets and/or solid support and resistance, it is hard to forecast if those new trends will continue, by soley using trend lines.

Overall Concept

Trend lines are usually classified as either a downtrend or uptrend. Downtrends are represented by a downward slopes and symbolize negative price action. The line is created by connecting two or more high points on the stock chart. If the price of a stock happens to break above the trend line, then that is classified as a bullish (or positive) sentiment. The trend line can then act as a support.

The complete opposite can be said about uptrends, which are represented by a positive slope. The line is created by connecting two or more lower points on the stock chart. A break below that line results in a bearish (or negative) sentiment. The trend line can then act as a resistance.

A typical time frame can have more than one line and slope. For example, Stock A may have been on a steady uptrend, but then the price got higher quicker than normal. This can be symbolized with two lines with larger slopes. It is a good indicator of great growth or bad decline in the company.

Trend lines can be as simple or complicated as you want them to be. We can create buy and sell point with trend lines as well.

Quick Check: If Stock A broke above our trend line would we be more likely to buy or sell?

Answer: Remember breaking ABOVE our trend line indicates that the line was downtrend. By breaking above that line, it would create a buying opportunity as it looks like the downtrend is over.

Although trend lines can get quite complicated if you want them to, there is really only one signal you need to look for: a break of the current trend line.

Important Reminders and Notes

• When acknowledging a trend line: the longer time frame it spans across; the more significant a break of the line is.
• The more points that touch a trend line; the stronger and more accurate of a trend it depicts.
• Solely using trend lines will not create reliable trades and results.

Trend lines are mainly used to determine if one should take action into a stock. Although it can be accurate, trend lines alone cannot produce reliable results every time; however, by properly being aware of a stocks current trend, it can help you cut down on stocks you may not be interested in.