How to Draw Trend Line in Stock Chart TUTORIAL

Technical Classroom: How to describe trendlines to indentify support & resistance on stock charts

A trendline is formed when a diagonal line can be drawn betwixt a minimum of two or more price swing points or pin points.

September 08, 2018 / 08:25 AM IST

Shabbir Kayyumi

Narnolia Financial Advisors

Basics of Technical Analysis: Part half dozen

Trendlines are an important tool in technical analysis for both trend identification and confirmation. One of the basic tenets put forth by Charles Dow in the Dow Theory is that stock prices moves in a trend. Trends are frequently measured and identified by "trendlines".

These trend lines tin can help us to identify potential areas of increased supply and demand, which can crusade the market place to motility down or up respectively. Trend lines tin help traders identify buying and selling opportunities that occur inside a strong tendency.

Types of Trendline

A tendency line is a straight line that connects two or more than price points and then extends into the future to act as a line of back up or resistance.

Trendlines are classified into two major types:-

i) Support Trendline

Effigy .1 Back up trendline (Neat taking support from trendline)

Equally shown above, yellow trendline is drawn past touching point ane and indicate 2, and afterward extending the straight line we could encounter that Nifty prices accept taken back up farther from information technology from point three & 4. This was an opportunity of buying which turned out to exist in line as indicated.

2) Resistance Trendline

Figure .2. Resistance trendline (Dr Reddy's stock taking resistance from trendline)

It is conspicuously seen from above chart that every time prices of Dr Reddy's Labs are approaching towards ruby-red resistance line, they are facing resistance. Subsequently taking resistance from point iii, four& v prices are trading lower.

Cartoon Trendline

Trendline is formed when a diagonal line tin can be fatigued betwixt a minimum of two or more than price swing points or pin points. It is too chosen as a sloping line which can be drawn on a nautical chart by connecting ii or more than points.

Trendline will take three points:-

Initiating Point (1): First point from where the line starts and used for initiation. The very showtime thing to know about cartoon trend lines is that you need at to the lowest degree ii points in the market to get-go a trend line.

Confirming Bespeak (2): Second point or point 2 which confirms the straight line afterwards connecting with a point 1. Once the 2nd swing loftier or depression has been identified, y'all can draw connecting tendency line.

Validating Bespeak (three): Third point is important and it confirms the validity of the trendline. Two points is speculative, three points confirms- It'due south important to note that any two reference points can offering a trendline- however it's the 3rd touch bespeak that confirms the validity of the slope. Therefore before relying too heavily on a given slope, await for that 3rd bear on point for conviction.

Figure .three. Support Trendline

Above figure explains about back up trendline, and how betoken three has validated trendline drawn from point 1 & two. It also indicated how point 4 has taken back up from trendline. Still bespeak four has acted every bit a good ownership opportunity, suggesting how trendline provides support and prices bounce dorsum by touching them.

Figure .4. Resistance Trendline

We have mentioned above almost resistance trendline, which can be drawn in like way however generally prices take resistance from point 3 & 4and trades lower. Looking at attached chart blue trendline is drawn by connecting betoken 1 & betoken two. And further ahead point three and signal 4 have taken resistance from blue trendline, which has given selling opportunity.

Important aspects of Trendline

Some important aspects to keep in mind while studying trendlines:
ane• Equally long every bit the cost action stays above this line, we have a bullish tendency. Lines with a downwards slope human activity as resistance to the price activity. Every bit long equally the toll action stays nether this line, we have a bearish trend.

2• Trend of higher time frame rules over the tendency of lower time frame. If the trend in higher time frame is up then downward trend in lower time frame might be a counter trend of uptrend and vice versa. So a trade taken in the direction of higher fourth dimension frame is more profitable.

3• Most trend lines 1 run into volition accept some overlap from the high or low of a candle, but what'south important is getting the about touches possible without cut through the body of a candle.

4• Line chart: On a long-term chart, trendlines fatigued with endmost toll are more than constructive. It is used for breakout and can exist used on all types of charts.

5• A pause of a trendline should fuel dispatch- When a slope is broken equally resistance or support, the subsequent move should see prices follow through in the direction of the break. If prices suspension and fail to accelerate in that direction, oft times this will be a sign of a 'false break out' scenario (besides known as a 'throw-over').

6• Flipping characteristics: Once the line is broken support becomes resistance and resistance becomes support.

Figure .5 Support Trendline becomes resistance trendline( Banknifty )

Conclusion

1• Call up of trendline as the diagonal equivalent of horizontal support and resistance.

2• They tin besides exist used every bit support and resistance and provide opportunities to open and close positions.

3• Depict trendlines through the lows of an upwards-trend — and through the highs of a down-trend.

four• On long-term charts, drawing trendlines through closing prices would give ameliorate results.

5• Trendlines must be respected by at least three lows (or highs in a downwards-trend) — if respected twice, the trendline is non yet confirmed.

Disclaimer: The author is Head - Technical & Derivative Inquiry at Narnolia Fiscal Advisors. The views and investment tips expressed by brokerage houses on Moneycontrol.com are their ain and not that of the website or its management. Moneycontrol.com advises users to cheque with certified experts before taking whatever investment decisions.

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How to Draw Trend Line in Stock Chart TUTORIAL

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