Do you want to learn everything about trend lines? such as how to draw a trend line, and how to trade using a trend line, fan principle, channel line, and price gaps. Then you are reading the right article. After reading this article you definitely learned about it.
I am Prabhat Kumar, a share market trader for 5 years. I had done so many trades using the concept of the trend line. In fact, In every technical analysis of stocks, I try to analyze using a trend line. So, I am very sure that you definitely learned all the things about trend lines and their surroundings topics after reading this article. Let’s start.
Concept Of Trend And Trend Line
The trend is the direction that shows you the direction of stocks. Generally, the Trend had three directions as upside, downside, and sideways.
Uptrend: When any stocks have an upside direction, It is called an uptrend. This type of trend makes higher high and higher lows.
Downtrend: When any stocks have a downside direction, It is called a downtrend. This type of trend makes lower lows and higher lows.
Sideways Trend: When any stocks have a sideways direction, It is called a sideways trend. This type of trend makes the same high and lows.
Trend Line: This is one of the most important things that we use in price action trading/investing. Now a question is raised How to draw a trend line? As you know that the trend uptrend continues by making higher highs and higher lows as this downtrend continue by making lower lows and lower highs.
Important Points:
1. The trend line in an uptrend is like angle based support line which gives support to higher lows of the uptrend.
2. The trend line in a downtrend is angle based resistance line which gives resistance to lower highs of a downtrend.
How To Draw A Trend Line?
The correct drawing of the trend line is a lot like every other aspect of charting and some experimenting with different lines is usually necessary to find the correct line.
Sometimes we draw the trend line that should be redrawn. You should follow some guidelines when you draw the trend line given below…
First of all, there must be evidence of the trend line that a minimum of two lower highs is taking support on-trend line in an uptrend, and a minimum of two higher lows are taking resistance on-trend line in a downtrend and in both second higher is greater than first.
And second, rememberable things are always checking the retracement that must be less than 50% for the valid trend line.
How To Use The Trend Line
The trend line is used in two types-
1. The price is taking support/resistance in the bull/bear market. It’s a sign of continuation of trend so we can take the trade in the way of trend.
2. The price is breaking the trend line in the bull/bear market. It’s the sign of reversal of trend so we can take the trade in the reversal way of trend.
How To Handel Small Trend Line Penetrations
The trendline penetrations are generally found in intraday trading and violate the market. But the closing of the price is in the way of the trend. In this situation, some analyst comes to doubt whether the trend line is broken or not.
Now to determine whether the trendline is broken or not you should redraw the trend line but, there is no hard and fast rule to follow in such a situation. Sometimes it is best to ignore the minor breach. But, must be analyzed that the breaking retracement is never more than 3% if that is more than 3% must beware and be ready to exit.
What Constitutes A Valid Breaking Of A Trend Line?
Generally, if the price closes beyond the trendline is more significant than just an intraday penetration.
For, the long-term chart like daily chart, weakly chart, or monthly chart, the closing penetration is not enough. It must be more than a 3% retracement for the valid breaking of the trend line.
How Trend Line Reverse Roles
When any trend continues as an uptrend and downtrend. As you know that in the uptrend the higher lows are taking support on the trend line and in the downtrend lower highs are taking resistance in a downtrend.
1. Uptrend Reverse In Down Trend: When the uptrend line has broken and the price will be taken resistance on the trend line. this is the major sign of a reversal of the trend.
2. Downtrend Reverse In Up Trend: When the downtrend line has broken and a price will be taken to support the trend line. this is the major sign of a reversal of the trend.
The Fan Principle And The Channel Line
This is a very interesting use of the Trend Line The Fan Principle. This happens when the market is very volatile. In this principle, a trend line is broken and takes resistance at retracement in the uptrend. And the trend line is broken and takes support at retracement in the downtrend. Now a new trend line is formed and these things continue and another new trend line is formed and repeats this process three times and now the trend is changed. This is an overview of the fan principle.
Note: the breaking of the third trend line is a valid trend reversal signal.
Important: the trend line with 45 degrees of slope is the most effective.
How To Adjust Trendlines
Sometimes, the trend may be accelerating or slowing in this situation we should be adjusted another trend line as in the fan principle the trend line is broken in uptrend/downtrend and we draw another trend line. Now we understand in an image.
Adjust The TrendLine In different Momentum
The Channel Line
The channel line is also said as a return line. This is another use of the trend line. It is formed when the price trade between two parallel lines. It can be all three of the trend as an uptrend, downtrend, or sideways trend. It is drawn as first you should draw a trend line and draw a reference line at higher/lower picks of the trend which must be parallel to the trend line.
Breakout/Breakdown Of The Channel Line
Let us consider that an uptrend/downtrend continues and a trend breakout the channel line. This can be a sign to change the trend if the breakout confirms with volume.
How To Trade With Price Gaps
The price gaps are generally signs of market strength in an uptrend and signs of market weakness in a downtrend. The Price gaps of three types in both trends are given below…
1. The Breakway Gap: This type of gap is formed when the price is breakout any pattern with gaps. It must be a gap containing (breakout) with heavy volume. After making gaps, the gaps should never fill by the price it can behave as support/resistance. It’s a sign of an upcoming heavy move. If this does not behave as support/resistance and its breaks then it’s a sign of weakness.
2. Runaway or Measuring Gaps: This type of gap is formed after the half move of the trend. It clear that after this gap we can measure the target that how far can go this is. This is also behaving as a support and resistance line.
3. Exhaustion Gaps: The final type of gap appears near-the final move of the market trend. After the formation of this gap, the price fills the gap and closes below/above the gap. It never behaves as support/resistance. It’s easily broken.
I am very sure that you learned very many things in this article as I said at the starting of the article If you have any questions definitely ask in the comment section.
I am a share market expert for the last five years. I have expertise in technical analysis, and fundamental analysis of stocks, and assets. On this website, I write content like analysis of shares, predict future targets of shares based on analysis, simplify technical analyses, and intraday trading.