“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.

Trend Lines

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).

Trend Lines

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.

Did you know?

Telephones and telex used for trading quotes were replaced in 1973, as Reuters introduced computer monitors.

Word of the day
"Non-Farm Payroll (NFP)" - A key economic indicator of the U.S. economy that reports on changes in the number of employees. The report excludes farm workers and those employed by the government, non-profit organisations and private households.
Pro Tip

Leverage is a double-edged sword. Understand it before you use it.

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