Description: Trendlines are one of the most basic yet one of the most powerful tools in the hands of a chartist. They help us to identify and confirm the prevailing trend. As Technical Analysis is based on the very premise that prices tend to trend, a simple trendline can often help us to gauge that very trend for positioning our trades accordingly.
In basic terms, a trendline is a line constructed by connecting at least two points that extends to the right of the chart that may act as a future support or resistance level. The same principles that are applicable for normal support and resistance levels are applicable in case of trendlines as well. To know more on support and resistance, please read What is Support and Resistance in Technical Analysis?
Uptrend Line: An uptrend line is drawn by connecting at least two low points on the chart with the latter being higher than the previous one resulting in a positive slope for the trendline. A third touch on the trendline makes it a valid one.
An uptrend line indicates that demand is greater than supply and hence a bullish stance is taken on the security. Till the time prices trade above the trendline, the uptrend is considered to remain in force, while a break below it indicates that the inherent demand supply equation is changing and hence a change in trend may be on the cards.
Downtrend Line: A downtrend line is drawn by connecting at least two high points on the chart with the latter being lower than the previous one resulting in a negative slope for the trendline. A third touch on the trendline makes it a valid one.
A downtrend line indicates that supply is greater than demand and hence a bearish stance is taken on the security. Till the time prices trade below the trendline, the downtrend is considered to remain in force, while a break above it indicates that the inherent demand supply equation is changing and hence a change in trend may be on the cards.
- Number of Touches: The more number of times a trendline is tested, the more valid does it become and hence more likely to act as a support or resistance in the future. It also increases it chances of breaking.
- Steepness: The ideal steepness or angle of a valid trendline is between 30 degrees to 45 degrees. Anything steeper than this is likely to break easily. In other words, the more steep the angle of the trendline, the less reliable does it become.
- Scaling: While trendlines can be drawn on both arithmetic as well as semi-log charts, it has been observed that when analyzing longer term charts such as Weekly or Monthly, the semi-log scale works better. On the other hand, for shorter duration time frames such as Daily or Hourly, arithmetic scaling serves the purpose.
Learn to trade profitably with us. Attend our Qualified Market Trader (QMT) program to enhance your knowledge on trading skills and become a profitable trader.