“The trend is your friend.”
A trend line is a basic concept in technical analysis, whereby you add a line to a chart to determine the direction in which the market is moving.
To draw a trend line, all you have to do is identify at least two major tops or bottoms in the price movements of an asset and connect them.
It’s that simple.
The image above shows two types of trends:
- Uptrend: determined by higher highs and higher lows. As you can see from the image above, an uptrend remains as long as each low does not fall below the previous lowest point registered.
- Downtrend: determined by lower highs and lower lows. A downtrend remains as long as each high registered is lower than the previous high.
A third type is the Sideways/Horizontal trend, where the tops or bottoms registered in an asset’s market price remain on similar levels.
In technical analysis, then, a trend is the movement of the highs and lows in the price of an asset. As the two images below show, the importance of trend lines lies in that they help traders recognise the point at which the price of an asset is more likely to begin moving upwards (1) or downwards (2).
When using trend lines to determine your trading, always keep in mind that the more times they are tested by an asset’s price, the stronger they are.