Trendline Definition & Example

Trend lines and why are they needed

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. 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.

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. Linear A linear trendline is a best-fit straight line that is used with simple linear data sets.

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.

Identify Trend Lines on Graphs - Expii

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 trend lines and why are they needed demand less supply is increasing even as the price rises. 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, the uptrend is considered solid and intact.

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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 declines.

A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers.

Choosing the best trendline for your data

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 on the Dow Theory. Scale Settings High points and low points appear to line up better for trend lines when prices are 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.

Trend Lines

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.

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In the case of Amazon. These false breakouts could have led to premature buying as the stock continued to decline after each one.

The Complete Guide On How To Use Trendlines

The semi-log scale reflects the percentage loss evenly, and the downtrend line trend lines and why are they needed never 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. On the semi-log scale, the trend line fits all the way up.

Trend Lines Move Over Time

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.

The slope of a trend line refers to the angle of a trend line relative to a horizontal line. The steeper the slope of the trend line, the more the relevant price level will change over time; the shallower the slope, the more gradually the price levels will change with time. The figure gives you a good idea of how short-term price levels based on a minute trend line will shift over the course of just a few hours.

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. Sometimes the lows or highs just don't match up, and it is best not to force the issue.

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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.

Now that the stock has bounced off of this level a fourth time, the soundness of the support level is enhanced even more.

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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 elliott wave theory binary options 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.

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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. If the lows are too far apart, the relationship between the two points 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. 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.

In this article, I will give you a complete introduction to trendlines and how to use them in your trading. How to draw and use trendlines Generally speaking, it is advisable to wait for three confirmed points of contact before you start putting further attention to a trendline. Most traders make the mistake and connect the first two highs or lows and then get overly excited once the price gets there again. However, a trendline is only confirmed if you can get three points of contact because you can always connect any two random points on your charts.

Angles As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from quickly earn adena in sharp advance or decline over a brief period of time.

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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.

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The trend line for Yahoo! YHOO was touched four times over a 5-month period. The spacing between the points appears OK, but the steepness of the trend line is unsustainable, and the price is more likely than not to drop below trend lines and why are they needed trend line. However, trying to time this drop or make a play after the trend line is broken is a difficult task. The amount of data displayed and the size of the chart can also affect the angle of a trend line.

Trend lines

When assessing the validity and sustainability of a trend line, keep in mind that short and wide charts are less likely to have steep trend lines and why are they needed lines than long and narrow charts. Internal Trend Lines Sometimes there appears to be the possibility of drawing a trend line, but the exact points do not match up cleanly. The highs or lows might be out of whack, the angle might be too steep or the points might be too close together.