Trendline Application On The Market Charts - Technical Analysis
There are numbers of reason why traders use trendlines on a market chart. In this post, we'll discuss a few reasons why. You will also learn the proper method to indicate a trend within a specific market.
Why learn trendline analysis?
1. See the current trend direction
Primarily, all markets will either go upward or downward. There are times wherein the market move to a general direction - that's what traders often called the "trend." The truth is, around 30 percent of the time, the markets are in a trending form. With the use of averages, the trendline and channel can be the best choice in removing data noises.
2. Establishing the potential support and resistance points in the future
Whenever the trends remain active, price levels are to reach trend lines within some point in time. But, it will need further effort in changing an established trend.
All efforts to change the trend in the market were analyzed better with a bar chart. On the market chart, the price bars usually recoil on the trend lines. The method is somehow similar to current trend lines. Look at the old trend lines patterns - the previous chart patterns, and indicate the areas of strong support and resistance. With this, you may see an intersection or overlap between the significant historical lines.
3. Identify directional changes and breakouts
Outside a trend channel, strong upward or downward move often leads to a reverse direction of the trend. It can also be an acceleration or deceleration in the price movements.
Good practice of constructing a trendline on a market chart
- In an uptrend market:
Use the convention whenever there are two low points and one common high point
- In a downward-upward movement market:
Use the convention whenever there are two high points and one common low point.
The difference of an uptrend line and a downtrend line
An uptrend is a positive slope line formed within the connection of two or more low points. It should have a second low point higher compared to the first line. Keep in mind that it needs to have three connecting points before considering it as a valid trendline.
This line considered as support that indicates the net-demand wherein it could increase equally with the rise in price. The combined rising price with increasing demand is very bullish. It could result in a strong determination on the buyer's part. Keep in mind that an uptrend can be intact and solid if the prices maintain a position above the trend line. A decline in the net-demand is when there's a break below the uptrend line.
A downtrend is a negative slope line forming within the connection of two or more high points. It should have a second high point lower than the first one. Similar to an uptrend line, it should consist of three connecting points before considering it as a valid trendline.
The line considered as resistance that indicates the net-supply wherein it could increase equally with the decline in price. The combined declining price with increasing supply is very bearish. It could result in strong determination on the seller's part. Keep in mind that a downtrend line can be intact and solid if the prices maintain a position below the trend line. A decline in net-supply is when there's a break above the downtrend line.
That ends our discussion on how to use and apply trendline analysis in the market charts.
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