Trend Lines – How They Work?
Trend lines are simple and one of the widely used methods of figuring out the trend in a stock market or any other financial market. They are straight lines drawn of a trading chart by joining two or more top or bottom positions and extending to the future. Trend lines are extensively used for determining support and resistant levels to execute trades – both by trend and range traders.
There are mainly two types of trend lines as uptrend lines and downtrend lines. Uptrend lines are used to figure out resistance levels and are drawn by joining two lower most points in a bullish chart, i.e., the second point is higher than the first one. The downtrend lines are for support levels, drawn by joining two upper most points in a bearish chart, i.e, the second point is lower than the first one. There are arithmetic trend lines – in which the axis are plotted according to arithmetic difference, log trend lines – which follow percentage difference, and semi-log trend lines.
The accuracy of trend line depends on the number of points that touches it and the steep of the line. Often a trend is confirmed when the third high/low point touches the line; the more touching points the more accurate the trend. With the increase in steep, the accuracy decreases. Trend lines can be drawn with any desired time interval; short-term traders prefer short intervals and long-term traders long intervals.
There are mainly two types of trend lines as uptrend lines and downtrend lines. Uptrend lines are used to figure out resistance levels and are drawn by joining two lower most points in a bullish chart, i.e., the second point is higher than the first one. The downtrend lines are for support levels, drawn by joining two upper most points in a bearish chart, i.e, the second point is lower than the first one. There are arithmetic trend lines – in which the axis are plotted according to arithmetic difference, log trend lines – which follow percentage difference, and semi-log trend lines.
The accuracy of trend line depends on the number of points that touches it and the steep of the line. Often a trend is confirmed when the third high/low point touches the line; the more touching points the more accurate the trend. With the increase in steep, the accuracy decreases. Trend lines can be drawn with any desired time interval; short-term traders prefer short intervals and long-term traders long intervals.
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