Trend lines are one of the most basic concepts of day trading (and long term investing), and they are also one of the most powerful concepts. Trend lines have been used for trading for as long as there have been markets, and they are well suited to any type of market (stocks, currencies, commodity futures, etc.). Trend lines are based upon the idea that markets move in trends (sustained movement in one direction, and then sustained movement in the opposite direction).
Trend lines show the general direction of the price movement (upwards, downwards, or sideways), the strength of the current price movement, and where future support and resistance are likely to be located. In addition to being drawn on price charts (usually bar or candlestick charts), trend lines can be drawn on indicator charts (such as the CCI, TRIX, RSI, etc.), where they show the same information, but are based upon the indicator's values instead of the prices.
What are Trend Lines?
Trend lines show three distinct but related pieces of information about their market. They show the direction of the current price movement, the strength (or more precisely the speed) of the current price movement, and the future support and resistance of the current price movement. These pieces of information can be used independently of each other, or they can be used together as part of a larger trading system.
Each of these valuable pieces of information are described in detail in the following articles :
- Direction of Price Movement
- Strength of Price Movement
- Support and Resistance
Drawing Trend Lines
Trend lines are straight lines that are drawn on graphical price or indicator charts. Upward trend lines are drawn on an upward diagonal from left to right (/), downward trend lines are drawn on a downward diagonal from left to right (\), and sideways trend lines are drawn horizontally from left to right (-).
The following tutorials explain how to draw each type of trend line :
- Drawing Upward Trend Lines
- Drawing Downward Trend Lines
- Drawing Sideways Trend Lines
Trading with Trend Lines
There are many different ways of trading using trend lines, but two of the oldest ways are trend line bounces and trend line breaks. Trend line bounces are trend continuation trades, because they expect the price to touch the trend line and then reverse back to its original direction. Conversely, trend line breaks are trend reversal trades, because they expect the price to go through the trend line and then continue in its new direction. Even though they are opposite trades, both trend line bounces and trend line breaks are based upon trend lines being support and resistance, so many day traders trade both of these trades. The following tutorials describe trend line bounces and trend line breaks in detail :
- Trend Line Bounces
- Trend Line Breaks