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5 Important Aspects of a Trendline

Jul 30, 2008
Trendlines are the classic heroes of technical analysis, forming the basic trading fundamentals for many portfolios. Trendlines are placed to forecast the future change in security prices. Trendlines plot out uptrends, downtrends and even sideways trends as a way to predict how prices change over time.

Subsequently, profitable traders make use of trendlines to predict movements and profit from the ups and downs of cyclical markets. Day trading strategies, combined with some creative techniques of your own, will help you make the most out of trendlines and generate consistent profits.

1. Well defined tops and bottoms of trends

A trendline should mark tops and bottoms that are well defined and conform to the line. Though it is not necessary to be perfect, a trendline should connect the tops of bottoms of movements together to show support and resistance.

2. A confirmation

Trendlines should be confirmed with a higher bottom near your own support, resistance lines, or by the change in short interest over a period of time. Confirmation of the trend helps you determine where buying and selling interest is the highest. Three or more tops or bottoms can also confirm the trend, whereas the original two could have been by just mere coincidence. Confirmation of the trend is very important as it helps protect your trading capital.

3. Trendlines need some backup

It is always wise to use other technical indicators as a means of verifying the trend. Proven strategies, woven in with trendline analysis, mix two forms for the best confirmations. The more variables used in a strategy, the more confirmations are included in each transaction. No strategy is complete with just a basic look into trendline analysis; a confirmation from your own day trading strategies produces better returns.

4. For every type of trend: uptrend, downtrend and sideways trends

Trendlines should aim to find the movements for a particular trend. In an uptrend, trendlines should point upward with little resistance and only a few touches to the top of the trend. In downtrends, the price should often touch the bottom of a channel, while bouncing after a few key growth spurts. Sideways trends are the best for trendlines because the sideways movement is more conducive to big moves. Sideways trends are often quick to crumble as the direction is not clearly defined, but instead it's a battle between buyers and sellers to force markets.

5. Very few breaks

Strong trendlines mean strong investments. The best trendlines do not have to be perfectly strong every time, but should not bend each time the market approaches. Professional traders map out the best lines but take into consideration how effective they are in moving the price.
About the Author
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a provider of educational trading products and services that are available worldwide. Trading EveryDay has complimentary/FREE products, a Tools of the Trade eBook and a Trading Room Report , that are downloadable for your convenience.
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