Stock Market Profits – Trendlines
A trendline is a sloping line drawn between two prominent points on a chart. Rising trendlines or Up trendlines are usually drawn between two troughs (two low points) to illustrate price support while falling trend lines or Down trendlines are usually drawn between two peaks (high points) to illustrate upside price resistance.
Trendlines are often excellent places to start trading points with a low-risk entry, because a penetration of the trend line is a break of the trend, which provides an exit signal. The more times the price touches the trend line, the more significant and valid that trend line becomes. When trend lines first begin to form, they may require redrawing to be sure to connect significant lows and highs, but as a trend line matures, it will rarely need to be adjusted. The steeper a trend line’s angle, the less reliable it becomes.
USE OF TREND LINES:-
1) Once a trendline is decisively penetrated, if it not a very steep trendline, it generally signals a reversal of trend. Sometimes, it indicates a temporary interruption of the prevailing trend and the current-trend (up or down) remain in force with a lesser degree of ascent or descent.
When a trend line is broken, there is no way to understand to whether it is a reversal signal or it is a temporary interruption. You have to find out and judge other price patterns (e.g. if there is a rounding top/bottom or a head and shoulder formation etc. etc.) for understanding the signal arriving out of trend line violation.
2) W.D Gann favored a 45-degree trendline as a major trend indicator. This idea has been will accepted by many analysts.
3) Once a trend line is penetrated, it reverses its role as support and resistance. Once a Up trend line, i.e. a support trendline is penetrated, the Extended trendline acts as a resistance. Once a Down trendline, i.e. a resistance trendline is penetrated, it acts as a Support line.
The greater significance of a line as a support or resistance prior to its penetration, the greater it support or resistance role in reverse after the violation taken place.
Source by Indrani Bhattacherjee
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