Market Trend Lines

Trading the financial markets requires knowledge and skill. This knowledge is important in the area of technical analysis. Technical analysis is the process of evaluating market prices.

Technical analysis determines increasing or decreasing prices. Trend lines are one aspect traders may use during technical analysis. This is helpful for traders because it helps make decisions.

A trend line shows a pattern of increasing or decreasing prices.  It gives insight into the future market price of an instrument. Trends can be bullish or bearish and involve other components.

An upward trend line is the creation of a line by joining two prices. The lowest price of the stock and the second lowest price are joined. The trend line is then carried out to the future on the graph.

A downward trend is created in much the same way as the upward trend. However, it uses the highest price and the second highest price. This line is also carried out to the future price on the graph.

What a Trend Line Tells a Trader

A trend line demonstrates the demand for the stock is increasing. This shows the demand is increasing as prices are increasing. Typically, demand for stock lowers prices but not in an upward trend.

An upward trend lines acts as a support for the market price. Conversely, a downward trend lines acts as a resistance to price. Technical analysis watches for prices to hit or near a trend line.

Trend lines are drawn on a market chart using the x and y axis. The arithmetic and the semi-log scale are used to draw trend lines. However, the semi-log scale is the preferred scale for trend lines.

The arithmetic scale uses equal interval amounts on the y axis. The semi-log scale uses incremental percentage values on the axis. The semi-log is preferred because of these incremental values.

Large price changes over a long time period require scale changes. The arithmetic scale may need two or three trend lines in this case. The semi-log scale will have one smooth line in large price changes.

The validity of a trend line is important for all traders investing. This is because the trend line tells when to trade a market. Trend lines can be proven valid by the number of points that touch it.

Trend lines are drawn by connecting the two lowest or highest points. If a third point can be used then the trend line is considered valid. A fourth point would add even more support and validity to the trend.

How to Use Trend Lines

Traders use trend lines to make important trading decisions. As long as the price stays above the trend, the market is bullish. The trader will remain in the trade as long as this is the case.

When the price falls below the trend it is a trend change signal. The trend is in a reversal and traders will sell to take the profits.

Trend lines are part of technical analysis of market prices. These trends can be quite beneficial in making trading decisions. It may not be possible to draw trend lines for all financial markets.

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