Trend Line Basics
Trend Lines are one of the basic technical tools. Nowadays people can draw it using Computer or similar software. In earlier days people used to draw it on paper. Trend Lines are drawn to understand the trend direction and predict the future price movement.
It also tells you if trend is losing momentum and an idea of trend reversal. Trend and trend reversal trading strategy using Support and Resistance in already discussed in previous chapter. The same trading strategy is also applicable in this case.
How to draw Trend Lines?
I have shown trend lines on Nifty 50 daily chart for last 9 months or so. This will give you an idea on how to draw trend lines of graph. There is no need to draw it always you can visualize the same as well.
First you have a look at the image then we can discuss about the trend lines after the image.
I prefer drawing trend lines using Day’s low. Days low takes care of all the price movement on that particular day. Now trend lines can be drawn based on closing prices. As closing prices denotes at what point days tussle ended.
Some people use average of days movement (like sum of Open Close High and Low divided by 4) to draw the trend line. This takes away any abrupt movement in prices during the day.
Which ever method you follow it gives decent result most of the time. The only time this method fails is if there is any abrupt market movement based on some news.
If you see above A and B are positive trend lines. The prices are moving upwards and point C is negative trend line. The prices are moving downwards.
You just have to draw a straight line from one days closing or opening or average. In the next section we will see how you can use this simple strategy to trade.
How to use Trend Lines for Trading?
Trend Lines give important insight into future price movement if trend continues. It also gives idea if the trend is on decline and will reverse with time.
If the prices are above trend line or inline with trend line then it is said that trend continues.If the prices move below trend line for one or two trading sessions then trend gets weaken and may get reverse soon. This get reflected in the line A and B both.
At point A the trend weaken and then goes to consolidation and again continues into Primary trend that is positive trend with line B. If you see after positive trend line B the prices close below trend line and then major down trend starts.
The down trend C then continues signifying trend reversal. This way you can plot trend lines and understand movement of prices. A major trend may have some minor trend reversals and after that original trend may continue.
This was reflected at line A. It was a positive trend and after that there was sudden decline on prices. Between trend line A and B there were minor trends (both positive and negative) and after that the original positive trend continues.
You can now revisit Dow theory. That theory explains well the minor trend between the major ones. The one discussed above is the simplest form of trend line. We will see advanced level of trend lines and its constructions in next articles.
For now this basic tutorial on trend lines will give you an idea about the topic. After this basic understanding we are prepared to dive deeper into the topic and create wide range of trend lines and trading strategy based on that.
So stay tuned for more article on this topic.