What are Trend lines?
Trend lines are lines drawn on the historical price levels that depict general direction of where the marking is heading, and provide indications of support or resistance.
Drawing trend lines is a subjective matter. The best test of whether a trend line is a valid one is usually whether it looks like a good line. In an up trend, a trend line should connect the relative low points on the chart. A line connecting the lows in a longer-term rally might be a support line that can provide a floor for partial retracements. The down trend line that connects the relative highs on the chart will similarly act as resistance to shorter moves back higher.
Any two relative highs or lows will be about the same line, so it is possible to draw a tentative trend line between any two points. Traders can use tentative trend lines as an indication of where support or resistance might be, but until a tentative line holds as support and / or resistance, it is not yet confirmed as valid.
Of course, the more times a trend line holds, the stronger it will be in the future. If a single line can connect 4 or 5 relative lows, then the chances from the next pullback bouncing off the line are high.
The best trend line?
It is an unusual situation where three points on a chart will exactly coincide with a straight line connecting them. More often, prices will be close to some line, and a best-fit line will have to suffice. This is where trend lines become more art than science. Different traders may draw different trend lines given the same chart or even connecting the same series of relative low things.
Sometimes a trend line will have to be revised as new relative highs or lows appear. Even if the trend line is a very close fit between three or more points, it is important to be flexible and redraw movement lines when necessary.
Any two relative highs or lows will be on the same line, so it is possible to draw a tentative trend line between any two points. Traders can use tentative trend lines as an indication of where support or resistance may very well be, but until a tentative line holds as support or resistance, it is not yet confirmed as valid.
Of course, the more times a trend line holds, the stronger it will be in the future. If a single line can connect 5 relative lows, then the chances of the next pullback bouncing off the line are high.
The best trend line?
It is an unusual situation where three points on a chart will exactly coincide with a straight line connecting them. Occasionally, prices will be close to a line, and a best-fit line will have to suffice. This is where trend lines become more art than science. Different traders may draw different trend lines given the same chart or even connecting precisely the same series of relative low points.
Sometimes a trend line will have to be revised as new relative highs or lows appear. Even if the trend line is a very close fit between three or more points, it is important being flexible and redraw trend lines when necessary.
Generally closing prices are more significant points than the intra-day prices on a chart, and if a trend line can be drawn using the body rather than the wick of a candle, the bodies cells should be used. Similarly, when drawing a trend line, an intra-day spike through a line should not automatically invalidate it. If there is a candle that closed below the trend line, though, it would be a much more serious breach of this line.
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