STOCK TALK

Stock Talk: Trendlines

Understanding the basics & fundamentals of trendlines.

The word “trend” means the direction of the price movement when you use this word as technical term for the market. In upward phase it is called “uptrend”. In a downward phase it is called “downtrend”.

In an upward phase, investors notice favorable materials (news, public information, financial information, etc.) to some stocks and begin to buy them, contributing to an uptrend.

In a downwards phase, investors notice unfavorable materials to some stocks and begin to sell them, contributing to a downtrend.

If you catch a trend, it is easy to earn profits. You buy in uptrend and sell in downtrend. However, as markets do not generally move upwards linearly or downwards linearly, this is not as easy as it sounds. The market moves are characterized by a series of waves moving up or down according to demand and news.

To find a broader perspective on a direction of the trend, one method is to draw trendlines to suggest a certain trend. The uptrend line is sometimes called the support line and the downtrend line is called the resistance line. Both lines drawn creates something known as a channel. Here is an example of a bearish channel.

Screen Shot 2020-08-28 at 1.00.50 AM

The continuing uptrend means that the low becomes higher than the low price of the previous and simultaneously, the current high price becomes higher than the high price of the previous. This means that the both the low price and the high price are rising.

On the contrary, the continuing downtrend means the high price becomes lower than the high of the previous and simultaneously, the low price of turning point becomes lower than the low price of the previous. This means that the both the low price and the high price of each points are falling.

When you decide that you have a trend (using your trend lines) and there is a questionable price action that breaks out of a trend, you will need to make sure that you use a lag to make sure your trend is confirmed to have ended.

If you are in a downtrend, and you believe that the trend has reversed, make sure you have higher lows and higher highs past the resistance line.

If you are in an uptrend, and you believe that the trend has reversed, make sure you have lower lows and lower highs past the support line.

Screen Shot 2020-08-28 at 1.04.20 AM

The trendline is one of the most useful technical analysis methods for everybody’s use. Because it is drawn by the user, some say that you can draw it arbitrarily. Especially if you are drawing a trend of a past market, it is likely to be “correct” because you already know the outcome of the market.

Here are some images below to help you get familiar with recognizing signals with trendlines.

Downtrend_Line

Uptrend_Line

Breakdowns

trend_line_and_channel

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