Today’s video is on one of the simplest technical indicators, Trend Lines. A market can only do three things - it can go up, it can go down, and it can go sideways. Trend Lines are an important trading tool for identifying and confirming the trend direction. They can also help predict areas of support and resistance and help traders spot important chart movements and significant price points.
A Trend Line is a straight line that connects a series of price points. The more price points the line touches, the stronger and more important the trend line is perceived to be. As a general rule, it takes at least three distinct points to confirm a valid trend line.
An Uptrend Line has an upward slope and is drawn by connecting three or more low points on a chart. Each low price point must be higher than the preceding low price point to form the positive sloping line. An Uptrend Line can act as support in a positive trending market. As long as prices continue above the Trend Line, the uptrend is considered intact. If prices break below the Trend Line, it could be an indication that the uptrend is coming to an end.
A Downtrend Line has a downward slope and is drawn by connecting three or more high points on a chart. Each high price point must be lower than the preceding high price point to form the negative sloping line. A Downtrend Line can act as resistance in a negative trending market. As long as price continue below the Trend Line, the downtrend is considered intact. If prices break above the Trend Line, it could be an indication that the downtrend is coming to an end.
How To Draw Trend Lines
When looking at a chart with a positive trend, start your trend line at the lowest possible charted price point. Then, extend the line until it reaches three points without violating other points of price action.
When looking at a chart with a negative trend, start your trend line at the highest possible charted price point. Then, extend the line until it reaches three points without violating other points of price action.