Trendlines

TREND

‘Trend’ in technical analysis means direction. It is one of the most important concepts in technical analysis. After plotting the stock prices on a chart, a line is drawn through the price movement to identify the direction of price. It’s called ‘trendline’ and it could slope either downwards or upwards.

A principle of technical analysis is that once a trend has been formed, it will remain intact until it’s broken. When there is little movement up or down it’s a ‘sideways’ or ‘horizontal trend’ .If you observe financial magazines or channels you might recall experts saying about ‘sideways movement’ in stocks  A sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. In any case, the market can move only in these three ways: up, down or nowhere.

LENGTH OR TIME FRAME OF A TREND

Trend lines can move in a same direction for any length of time until something major happens in the market that brings a change in the demand -supply balance and hence a change in price direction.  A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend depending on the time frame we are talking about.

In terms of the stock market, a major trend (long term trend) is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month.

A long-term trend may be composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. See the graph below:

As explained earlier, a long term trend is one which lasts for a year or more .So in order to analyze the long term direction of a stock you need to take the stock chart of a year or more. Similarly to analyze a medium term trend you need to check the graph for a 6 month period or so. Short term trend can be analyzed by taking the graph for a short period ,say 10 or 30 days . In short, a stock chart should be constructed to best reflect the type of trend being analyzed.

DRAWING A TREND LINE

Drawing trend lines are the basics of technical analysis. The explanation on how to draw may be confusing to a learner, but in actual practice it’s no big deal.  In an uptrend analysis, draw a line from the lowest low, up and to the highest minor low point preceding the highest high, so that the line does not pass though prices between the two low points. This when completed will be an ‘upward trend line’ similarly , To draw a downward trend line ,  draw a line from the highest high, down and to the lowest minor high point preceding the lowest low, so that the line does not pass though prices between the two low points .

You may also refer to the figure given above. The blue line starts from the lowest low and up to the ‘highest minor low’  point preceding the highest high and the downward trend line represented by the red line starts from the highest high and down to the lowest minor high point preceding the lowest low point.

That’s about trend lines. Drawing trendlines is just the beginning. To move further, you need to learn something called ‘support and resistance levels’ more about that in our next section.

Bye for now ..

have a nice day !!

You may like these posts:

  1. Types of Charts
  2. Technical Analysis
  3. Should you invest or trade in stocks?

6 Responses to “Trendlines”

Anonymous

October 7, 2011 at 2:40 am

nice blog, unique article, and content.

Anonymous

October 8, 2011 at 8:51 am

Useful details! I have already been looking for something similar to this for a little bit now.

sharemarketzone

June 4, 2012 at 2:20 pm

No matter if you are stock market trader or investor, You need to be very careful while dealing in Indian stock market. Stock market offers huge returns but many less people are able to stay in profit just think why? Is it because of lack of share trading knowledge? Well let’s discuss this in this nice blog and see what everyone has to say about it. Come one let’s start a discussion which will benefit lot of stock market traders and investors.

Tamil

October 19, 2012 at 9:58 pm

gud post … nice site

Rishal

March 29, 2013 at 10:36 pm

Hey do you suggest any websites which lets to draw trend lines.. I used zignal charts.com but is of no help. It has hard time to get the correct price in down trend as chart doesn’t let the software to move it up to see the prices.. Basically if it is flexible to adjust the chart space, its easier to get to the chart price.. I need something like that to draw stock analysis for Indian stocks.. I do it for US stocks by using freestockcharts.com but I dont find same features in zignal charts.. It lacks vertical line, horizontal line and flexibility of moving up and down. I would be grateful if you could suggest something. Thanks

J Victor

March 30, 2013 at 10:26 am

Hi , nice to meet. I rely on fundamental data rather than analyzing stocks technically. There are some paid software available but i am not sure if there are free stuffs which would serve your purpose. Will let you know if i come across any.

Leave a Comment