Technical Analysis
Line Studies
Other Tools
Trendlines
Trendlines
Trendlines are widely used in technical analysis.
But it should be noted that there is not consensus of opinions about
methods of their building and interpreting. So nobody is surprised at
the fact that different analysts using identical data of the same time
period draw absolutely different trendlines.
A
trendline is a straight line that connects two important minimum or
maximum points in the chart. Any amount of secondary and small trends
can be found within the main trend. their lengths can vary within a
rather wide range.
It should be noted that a trendline should not intersect other prices
between these two points. A trendline represents a resistance or
support pass-through where price changes within the range of the
pass-through.
Prices
can break through ascending and descending trendlines, as well as
support and resistance levels, when the investors' expectations change.
The trendlines can be categorized as follows:
- Downtrend is characterized through
sequential decreasing of maximum prices. It can also be considered as
descending resistance level: Bears set the pace as they push prices
down.
- Uptrend is characterized through
sequential increasing of minimum prices. It can also be considered as
ascending support level: Bulls set the pace as they push prices
up.
- Sideways Trend - price does not practically move at all.
Trendlines can be categorized by their importance using the five indications below:
- time scale: the larger is the time
scale, the more important is the trendline. The trendline in the weekly
chart shows a more important trend than that in the daily chart, and
the latter show a more important trend than the trendline in the 1-hour
chart;
- length: the longer is the trendline, the more reliable it is.
The short trendline displays the behavior of masses within a short time
interval, and a longer trendline displays their behavior within a
longer period of time;
- how many times prices touch the trendline: the more is the
count of touches, the more reliable is the trendline. A preliminary
trendline is drawn through only two points, sp the third point makes it
more reliable and four or five points show that the group prevailing in
the market at this moment has a significant potential;
- slope angle: the angle between the trendline and the
horizontal line reflects the intensity of emotions among the prevailing
market crowd. An abrupt trendline means that the prevailing crowd is
dynamic, and a relatively flat trendline means that the prevailing
crowd is rather inert. A flat trend usually develops longer;
- volume of transactions: it reflects how serious the players
are, as well as the count of participants interested in retaining the
existing trend. The increased Volume usually serves as confimation of the preceding trend.
To
draw a trendline, it is enough to have two points it to be drawn
through, and one more point "to confirm" the trend. The trendline
exists until it is broken through due to a price flick up or down. The
"dog-legs" in trendlines are relatively rare. If there is no
consolidation, the longer it does not happen, the sharper is the
subsequent turn.
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