What is a trendline? What are the important points to keep in mind while drawing a trendline?
The trend line is used to identify trend reliability, support & resistance levels. It is a method to predict what will happen with a stock in the future.
Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis 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.
Here are some more tips for trend line
- The more times a stock touches a trend line, the more significant it becomes.
- It takes two touches to draw a trend line, but 3 to confirm it as being a valid one.
- In a downtrend, draw the line along with the highs of prices.
- In an uptrend, draw the line along with the lows of prices.
- A trend line break does not mean that the trend will change. A complete trend line trading system might consist of a trend line break in combination with strong volume in the correct direction.