People have tried just about everything to succeed in trading and believe complex theories give good results.
But simple things work wonderfully well in life and as well as in trading.
The trend line is one such simple tool in technical analysis that can offer much help in all types of trading, be it intraday trading or swing trading.
A Trend Line is a straight line drawn on candlestick charts by connecting two or more price peaks, which reveals the trend of the script, support, and resistance points, and allows to spot any excellent trade opportunities.
Below are some useful references to draw a trend line:
1. Price Peaks
2. The Slope of the Trend Line
3. The price should respect the Trend Line
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Price Peaks
You should connect a minimum of 2 peaks to consider it as a valid trend line.
Above is the example of a trend line that connected 4 peaks.
To be precise, it is also called a Support Trend line.
Image 2 shows another example of a trend line that connected 4 peaks.
To be precise, it is also called a Resistance Trend Line.
A trend line can be considered as a powerful trend line when it connects more peaks.
The Trend Line drawn in Image 3 is powerful as it connects 7 peaks.
We should note that when a price shows a decisive break of such a powerful trend line, it will give a quick and big move on the opposite side.
The Slope of the Trend Line
Ideally, the trend lines that show a less-to-medium slope (less than 45 degrees) are the safest options.
Because it is a sign of a healthy trend.
As the slope of a trend line increases, the validity of the support or resistance level decreases.
A steep trend line results from a sharp advance (or decline) over a brief period.
The trend line created from such quick moves is unlikely to offer strong support or resistance level on the price.
Even if the trend line is connected with 3 or more valid points, attempting to take a trade is not a good idea.
Image 4 shows an example of a steep trend line.
It is not a healthy sign of a trend, and most probably, this stock is the victim of operators.
The Price Should Respect Trend Line
Whenever you draw a trend line, ensure price respects the trend line with all its peaks.
Image 5 shows a trend line that is respected by all the peaks of the price. Hence, this is a powerful trend line.
Image 6 shows a trend line that is not respected by all the peaks of the price. Hence, this is a not powerful trend line.
Refrain these stocks while drawing trend lines
Traders should avoid operator stocks to draw trend lines. Besides, they should also avoid stocks that don’t show smooth price action. In both cases, there is a high probability of hitting the stop-loss.
Below are some of the examples.
If you look at Image 7, it has too many gaps and no activity on many trading days. It clearly shows that some operators are controlling this stock.
If you look at Image 7, it has too many gaps and no activity on many trading days. It clearly shows that some operators are controlling this stock.
If you look at Image 8, it has many selling wicks and buying wicks (highlighted in yellow). Besides, it also has some gaps (highlighted in violet).
It can trigger your buy order or stop-loss order unnecessarily and can move in the opposite direction. Hence it’s better to avoid such stocks.
Conclusion
Always remember, drawing a trend line is subjective and art. Remember these guidelines whenever you try to draw a trend line.
If you are a beginner and need some guidance, then you can do one assignment. Draw trend lines for 100 charts, copy all the charts in a word document (or google sheet), and send an email to ‘Indrazith@profiletraders.in’. We will reply with the comments within a week.
Please note, one should not take trades immediately after drawing trend lines. A study of Support & Resistance concepts and Powerful Candlestick Patterns are essential to opt for a trade.
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