Trend lines are constructed by connecting a series of peaks and troughs. Down trend lines connect rally highs or peaks. Up trend lines connect a serious of bottoms.

Two successive lows/highs are required for drawing the trend lines initially, but a third high/low are also required for confirmation/validity.

The straight is drawn joining peaks/troughs, but a trend lines is more preferable if it can be drawn through the areas pf maximum congestion. Areas of congestion represent areas of market consensus and are more amiable to drawing trend lines. High and low prices represent the areas where weak traders reacted and closed their losing positions; and fro where, smart traders started to take positions, High-low points reflects the total action of the market.

USE OF TREND LINES:-

1) A good trend lines reflects the underlying trend. The basic assumption is that a trend in motion will tend to remain in motion until a valid reversal occurs.

2) Once a trend lines is identified, the trend assumes a certain rate of speed, or slope and the slope is maintained for a certain period, unless the very trendline is broken or pierced by the underlying price chart.

3) So, trend lines help in –

a) to determine the extremities of the corrective phases, and

b) to identify when and where the trend is changing.

4) The trend lines should be extended to ascertain the future support/resistance points.

5) Trend lines obtain their significance from 3 factors:

a) Length

b) Number of times touched or approached and

c) Angle of ascent or decent.

(a) Length – Trend lines may be short term, intermediate term or long term. Violation of short term trend line will have minor consequences, whereas the violation of a long term trend line will have far more significant consequences.

(b) Number of times touched or approached – The more times a trend line has been touched or closely approached, the better it will reflect the trend; i.e. the greater will be its significance as a support or resistance area. Significance here also implies reliability, since trend line violation can often turn out to be whipsaw. So, the more times a line has been touched or closely approached, the more reliable is the signal.

(c) Angle – If a trend line is very steep, it is generally unsustainable for long. So such trend lines are not very significant. These are very short –term or very short-term trend lines. Often after breaking such steep trend lines, prices tend to consolidate/ accumulate and then the original trend is again found in the intermediate term or long term after formation of a less steep trendline. A less steep trend (with an angle of lower degree) is substantial in he long-term and any penetration of such trend line is more significant, which often gives a signal of ‘Trend Reversal’.

Measuring Implications of Trendlines

Once a trendline is broken, prices usually moves a distance beyond the trendline equal to the other side of the line, prior to the rend reversal. Three trendlines can be drawn resembling a hand-fan. The breaking of third lines gives an indication that the trend has reversed and the market is headed lower.

This is called the ‘Fan Principal’.

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