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Trendlines
It
is through the use of trend lines and Dow Theory
where we will learn our first analytical method.
Trend lines are one of the most important tools
in technical analysis and should never be overlooked.
The use of trend lines can be found in almost every
technical method. In our first application of trend
lines, we will apply them to the price chart.
Overview
- Uptrends consist
of a series of successively higher highs and
lows.
- Downtrends consist
of a series of successively lower highs and
lows.
The first
consideration when looking at any market is the
direction of the long term trend (with the exception
of day traders).
Prices can
only go in three directions; up, down, and sideways.
A long line of past price ranges together gives
you a pattern. There will be plenty of dips and
bumps along the line but you should still be able
to discern a general direction up, down, or sideways.
We can help spot this direction or trend by drawing
in "trendlines".
Drawing
trendlines during an up trending market: The trendlines
above have been drawn by connecting as many successive
lows as possible (along the bottom of the price
range). An up trending trendline represents major
support for prices as long as it is not violated.
Trendlines
connecting highs can also be drawn to indicate the
top of the established trend or channel (blue lines).
These trendlines indicate the major zones of resistance.
(See below for a discussion of support& resistance).
Drawing
trendlines in a down trending market. Down trending
trendlines are drawn by connecting the successive
highs.
Trends can
push and pull the price up or down. Markets can
also enter a period of quiet stability where the
price forms a horizontal line sideways across the
page. A sideways trending market is normally a difficult
market to trade for a profit. It can, however, set
the stage for a sharp move once the sideways trend
is broken (signalled by a price break through a
well-established trendline).
A sideways
pattern represents stability between supply and
demand in the marketplace. Trendlines in this type
of market, often referred to as a narrow trading
range or congestive phase, are drawn by connecting
both the highs and lows. Prices In this type of
market can break upward or downward so it is valuable
to establish the top and bottom of the range (see
the report on Breakout
signals)
Next: Support
and resistance lines
