Trend Lines

Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.

Uptrend line (bullish)

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope.

Downtrend line (bearish)

A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope.

A trend becomes more probable and reliable the more the prices touch the actual trend line.

A trend can of course change and this happens when the price breaks out from the support/resistance levels. From that point onwards, a new trend will be formed.

A trend line can be drawn be joining two or more closing prices on a particular chart we are working on. In the previous case we have seen trend lines using line graphs. Trend lines, can also be drawn on candle charts however it is advised to draw the lines using the closing prices and not the candle ‘wicks’ (or shadows).

A trend is basically a line that also acts as a support or resistance and these are known as dynamic (resistance/support) rather than static. In this case, the change of polarity principle still applies since a trend line which is acting as a resistance can be easily changed into a trend line offering support (and vice versa).

When a trend line is highly sloped, it is considered stronger as the % change from a point to the next is much higher in comparison to a trend line which is less sloped.

The trend line (A), is the most sloped of all the trend lines and hence  is the strongest of the three trends. A trend line which is so strong will most generally have a shorter duration in comparison to trends which are less sloped (e.g. Trend B and Trend C are expected to last more than Trend A).

A trend line which is much more inclined (A) has a higher probability to be broken before the others (B) and (C).

This is an example of several trend lines drawn in a bull market.

This is an example of several trend lines drawn in a bear market.

An important graphical analysis to take note when using trend lines is the use of Trend Channels.

A trend channel is a continuation pattern that slopes up or down and is bound by an upper and lower trend line. The upper trend line marks resistance and the lower trend line marks support. Trend channels with negative slopes (down) are considered bearish and those with positive slopes (up) bullish.