Defining trend line, Identify Trend Lines on Graphs - Expii
Additional Resources Trend Lines As technical analysis is built on the assumption that prices trend, the use of trend lines is important for both trend identification and confirmation.
Types of Trend Lines
A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Many of the principles applicable to support and resistance levels can be applied to trend lines as well.
It is important that you understand all of the concepts presented in our Support and Resistance article before continuing on.
Definition Uptrend Line An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope.
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Note that at least three points must be connected before the line is considered to be a valid trend line. Uptrend lines act as support and indicate that net-demand demand less supply is increasing even as the price rises.
- TREND LINE | meaning in the Cambridge English Dictionary
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A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, defining trend line uptrend is considered solid and intact.
Choosing the best trendline for your data
A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent. Downtrend Line A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope.
Downtrend lines act as resistance, and indicate that net-supply supply less demand is increasing even as the price defining trend line.
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A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent. For a detailed explanation of trend changes, which are different than just trend line breaks, please see our article defining trend line the Dow Theory.
Scale Settings High points and low points appear to line up better for trend lines when prices deposit option displayed using a semi-log scale.
This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. An arithmetic scale displays incremental values 5,10,15,20,25,30 evenly as they move up the y-axis.
A semi-log scale displays incremental values in percentage terms as they move up the y-axis. In the case of Amazon.
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These false breakouts could have led to premature buying as the stock continued to decline after each one. The semi-log scale reflects the percentage loss evenly, and the downtrend line was defining trend line broken. In the case of EMC, there was a large price change over a long period of time. While there were not any false breaks below the uptrend line on the arithmetic scale, the rate of ascent appears smoother on the semi-log scale.
EMC doubled three times in less than two years.
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On the semi-log scale, the trend line fits all the way up. On the arithmetic scale, three different trend lines were required to keep pace with the advance.
Validation It takes two or more points to draw a trend line. The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. It can sometimes be difficult to find more than 2 points from which to construct a trend line. Even though trend lines are an important aspect of technical analysis, it is not always possible to draw trend lines on every price chart.
The type of data you have determines the type of trendline you should use. Trendline reliability A trendline is most reliable when its R-squared value is at or near 1. When you fit a trendline to your data, Graph automatically calculates its R-squared value. If you want, you can display this value on your chart.
Sometimes the lows or highs just don't match up, and it is best efficient binary options trading to force the issue. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity. After the third touch in Nov, the trend line was considered a valid line of support.
- Trend Lines [ChartSchool]
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Now that the stock has bounced off of this level a fourth time, the soundness of the support level is enhanced even more. As long as the stock remains above the trend line supportthe trend will remain in control of the bulls.
A break below would signal that net-supply was increasing and that a change in trend could be imminent. Spacing of Points The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together. The most suitable distance apart will depend on the timeframe, the degree of price movement, and personal preferences.
If the lows highs are too close together, the validity of the reaction low high may be in question.
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If the lows are too far apart, the relationship between the two defining trend line could be suspect. An ideal trend line is made up of relatively evenly spaced lows or highs.
The trend line in the above MSFT example represents well-spaced low points.
Let's look at the scatter plot used in this explanation to show a trend line. The data is recorded below. We're going to graph these points on a scatter plot. This graph has a positive correlation.
On the Wal-Mart WMT example, the second high point appears to be too close to the first high point for a valid trend line; however, it would be feasible to draw a trend line beginning at point 2 and extending down to the February reaction high. Angles As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance or decline over a brief period of time. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level.
Even if the trend line is formed with three seemingly valid points, attempting to play a trend line break or to use the support and resistance level established it will often prove difficult. The trend line for Yahoo! YHOO was touched four times over a 5-month defining trend line.