How to draw trendline
The trendline helps not only to determine the extremities of the corrective phases, but tells us when the trend is changing. A up trendline provides a support boundary under the market that can be used as a buying area. A down trendline can be used as a resistance area for selling purposes. As long as the trendline is not violated, it can be used to determine buying and selling areas. Very often, the breaking of the trendline is one of the best early warnings of a change in trend.
How to draw trendline
An up trendline is a straight line drawn upward to the right along successive reaction lows. A tentative trendline is first drawn under two successively higher lows, but needs a third test to confirm the validity of the trendline. A down trendline is drawn downward to the right along successive rally peaks. Similarly, the tentative down trendline needs two points to be drawn and a third test to confirm its validity.
The correct drawing of a trendline should include the entire day’s trading range. The technique of including the day’s price range take into account all of the activity ans is the more common usage.
How to determine the significane of a trendline?
The answer to the question is twofold–the longer a trendline has been intact and the number of times it has been tested.
What constitutes a valid breaking of a trendline?
Most technicians employ a variety of time and price filters in an sttempt to isolate valid trendline penetrations and eliminate bad signals.
One example of a price filter is the 3% penetration criteria. This price filter is used mainly for the breaking of longer term trendlines, but requires that the trendline be broken, on a closing basis, by at least 3%.
An alternative to a price filter is a time filter. A common time filter is the two day rule.To have a valid breaking of a trendline, prices must close beyond the trendline for two successive days.
Measuring implications of trendlines
Trendlines can be used to help determine price objectives. Stated briefly, once a trendline is broken, prices will usually move a distance beyond the trendline equal to the vertical distance that prices achieved on the other side of the line, prior to the trend reversal. In other words, if in the prior uptrend, prices moved $50 above the up trendline, then prices would be expected to drop that same $50 below the trendline after it’s broken.
The relative steepness of the trendline
In general, most important up trendlines tend to approximate an average slope of 45 degrees. The 45 degree line reflects a situation where prices are advancing or declining at such a rate that price and time are in perfect balance. If a trendline is too steep, it usually indicates that prices are advancing too rapidly and that the current steep ascent will not be sustained. If a trendline is too flat, it may indicate that the uptrnd is too weak and not to be trusted.