| Dear Fellow Trader. | | | | and all positions in the direction of the previous trend |
| Although a trend line is very basic and probably the | | | | should be closed. |
| most basic technical indicator, it is very valuable in | | | | If you choose to use a trend line to trade with a |
| many ways. | | | | prevailing trend, then you should trade in the direction |
| In order to draw a trend line one needs at least 2 | | | | of that trend. There's an adage that says: "the trend |
| points to connect. This is usually done by connecting | | | | is your friend". And that's how you should treat a |
| the first and the last closing price over a period of | | | | trend especially if you trade short-term. It is not so |
| time say, 1 month, 3 months, 6 months etc. It's | | | | important with long-term investments. But on |
| entirely up to you. If you trade short-term you would | | | | short-term it definitely is! In other words, during an |
| take a shorter period and with long-term trades the | | | | uptrend you would buy stocks or call options and |
| period that the trend line will cover would obviously | | | | during a downtrend you would sell stocks or buy put |
| be longer. | | | | options. |
| However, at this point it is only a tentative trend line. | | | | When using trend lines, it is important to be aware of |
| The trend line will become more and more valid after | | | | how long a trend has already been in place and when |
| the prices have tested the tentative trend line | | | | the trend is about to end. At major turning points, |
| several times maintaining the overall trend. Once a | | | | the crowd is often wrong about the direction |
| valid trend line is in place, it becomes useful in many | | | | meaning that at these point the masses usually get |
| ways. | | | | heavily involved with a trend just as it is about to |
| One of the basic concepts of a trend is that a trend | | | | reverse. |
| in motion is more likely to continue than reverse. In | | | | Knowing how to identify these trend changes will |
| addition, a trend also takes on a certain slope as | | | | present one of the most profitable trading |
| identified by the trend line, and will usually maintain | | | | opportunities, because when a trend line is broken |
| that same slope. Therefore a trend line not only helps | | | | the stock will usually assert itself strongly in the |
| determine buying and selling points, but is also useful | | | | direction of the break. |
| in signaling a changing trend. | | | | What Constitutes A Valid Break Of A Trend? |
| An uptrend line provides an area of support where | | | | As a general rule, it can be said that a stock needs |
| investors can buy equity whereas a downtrend line | | | | to close below an uptrend line or above a downtrend |
| provides an area of resistance where investors would | | | | line to constitute a valid break. But even then, the |
| sell equity. | | | | break should be followed by at least one or two |
| Support, also known as support level, is simply a | | | | other subsequent closes below the trend line before |
| trend line where prices tend to drop to but don't | | | | it can be considered a valid break. |
| pass through. Once touched, prices then rebound | | | | Just too often, a break of an uptrend is just due to |
| back up again. Vice-versa, resistance is a trend line | | | | profit taking. Then, the next day, investors often |
| where prices tent to move up to but don't pass | | | | pick up on this stock that has now become cheaper |
| through. Once touched, prices will then drop again. | | | | and buy into it again continuing the uptrend the stock |
| Now this obviously doesn't happen all the time. A | | | | was in just before it droped. |
| trend line can also be broken where prices will then | | | | In addition it can be said that the longer the trend |
| move in the opposite direction creating a new | | | | has been in place, the stronger the trend is. And |
| opposite trend. | | | | more often than not, a penetretion of a significant |
| So as long as a trend line remains intact, it can be | | | | trend will lead to a large move in the direction of the |
| used to determine buying and selling areas. Once a | | | | break. |
| trend is broken, it is a signal of a change in the trend | | | | |