Introduction to Trend LinesOn the left side we can see the anatomy of an uptrend and downtrend line.
On the right side we can see a few examples, which should help build a mental image of how they look and work, in action.
Trend lines are the foundation of technical analysis.
Uptrend lines are formed by higher lows and signify a bullish trend. Pullbacks don’t specifically get smaller but impulse waves (movements up) are higher, showing an upward trend. They serve as “support” levels and tend to support the trends upward movement. When their support is tested, they can be considered dips, troughs or valleys.
The opposite is true in a downtrend. It is formed by lower highs and signifies a bearish trend. Downtrend lines serve as resistance as they “resist” the price from going up until they are broken.
Once the trends are broken, they can and usually do see a rally. On the break of an uptrend towards the downside, the price usually proceeds to fall.
On the break of a downtrend toward the upside, the price usually proceeds to rise.
This is because, for example, in a downtrend line, traders tend to lose confidence of a bullish trend until that downtrend is broken. They often exit their trades in the beginning of a downtrend and look for a re-entry on a trend reversal, or a break of the downtrend towards the upside.
How do you draw them?
Generally by connecting 2 tops (on a downtrend) or 2 bottoms (on an uptrend).
It is often said that 2 is all you need to draw a potential line but 3 or 4 is what it needs to become a valid line.
The more tops and bottoms that “connect”, the stronger the trend is.
3 is generally weak, 4 is a little stronger, and something like 5 or 6 are a pretty valid and strong trend.
The steeper it is, the less reliable, usually because that indicates higher volatility.
The stronger the trend is, the bigger the rally is when it breaks.
For example, a break of support of 2 points might not see much movement but a break of support of 6 points could see significant downward movement.
This is usually due to a few things, one being the psychology behind it.
As support gets tested more times on an uptrend, bears, or sellers, tend to lose confidence, so once it breaks after a lot of tests, a significant amount of them tend to come back in.
Thank you for reading, let me know if you like and enjoy these educational posts. Based on feedback, I may continue to post them and try to wrap up the basics of Technical analysis in 5-10 minutes a day, 1 by 1.
The future posts would cover:
Types of Charts
Candlestick Patterns
Support and Resistance
Volume
RSI
Bollinger Bands
Stochastic Indicator
ADX
MACD
SMA / EMA
Fibonacci Retracements
Pivot Points
Oscillators
Elliot Wave
Harmonic Patterns
