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What Is A Trend Line?
Trend lines are diagonal lines drawn through a chart, highlighting a price range or trend. These lines follow a financial asset’s price movement to show traders how high or low the price may move in a particular duration. Individuals can utilize the information to buy or sell securities.
Trend lines are one of the most popular price action indicators in the technical analysis of stocks, currency pairs, and cryptocurrencies. One can draw trend lines by joining a series of prices representing a financial instrument’s support and resistance in any duration. These lines are of different kinds, for example, exponential, polynomial, linear, etc.
Table of contents
- What Is A Trend Line?
- The trend line meaning refers to a diagonal line drawn through a price chart to show the trend. A minimum of two swing lows or swing highs are necessary for individuals to draw it in either direction.
- There are different trend line types that one can use in different situations. For instance, individuals can use the exponential one when data values fluctuate at increasingly higher rates.
- One can identify an upward trend line pattern or uptrend when every consecutive peak and trough is higher than the earlier ones in the price chart.
Trend Line Trading Strategy Explained
The trend line meaning refers to a line drawn under pivot highs or lows to give traders an idea regarding the existing direction of a financial instrument’s price. Also known as a line of best fit, it is the most common tool used by technical analysts to decide whether to buy, sell, or hold a financial instrument.
Understanding the direction of this line is an easy way for traders to increase the possibility of executing a profitable trade, as it ensures that the general working forces are working in Analysts must have a minimum of two points on a price chart to draw trend lines. While some individuals utilize different durations to view trends, some people do not utilize time at all. Instead, they look at trends based on tick intervals.
A downward-sloping line of best fit or downtrend features lower highs and lower lows. It indicates that an excess supply of financial security exists in the market. In other words, it suggests that market participants are willing to sell the financial instrument rather than buy it. When individuals find that a financial asset’s overall long-term trend is downward sloping, they must avoid taking a long position.
On the other hand, an upward-sloping trend line pattern or uptrend indicates that the demand for the financial asset is more than the supply. Thus, it is a sign that the price is likely to rise further. So, traders may opt for a long position to make financial gains. One must look for higher highs and higher lows to spot an uptrend.
Besides uptrends and downtrends, sideways trends exist in the market. These trends arise when a financial instrument’s price moves between strong support and resistance levels. In this case, prices trade within a horizontal range without any definitive downward or upward movement. Therefore, traders must ensure apparent stop losses and entry and exit points to profit from sideways trends.
Types
The different trend line types are as follows:
- Linear: The linear pattern is useful in the case of simple linear data sets. It shows that the price is rising or falling steadily.
- Polynomial: The polynomial pattern is a curved line used when data fluctuates. For instance, individuals can use it to analyze profits and losses over large data sets.
- Exponential: One can use this variant when data values surge or drop at increasingly higher rates. That said, one cannot use it if the data set consists of zero or negative values.
- Moving Average: This trend line pattern smoothes out a financial asset’s price fluctuations to show a trend clearly. It utilizes a particular number of data points, averages them, and utilizes the average value as a point in the pattern.
- Logarithmic: Also known as the best-fit curved line, it is beneficial for traders when the rate of price fluctuation surges or drops quickly and before leveling out.
Equation
A trend line signifies a linear relationship. The equation for this relationship is as follows:
y = mx + b
Where:
- x is the independent variable
- y is the dependent variable
- b is the y-intercept
- m is the line’s slope
Examples
Let us look at this Som Distilleries & Breweries Limited chart to understand the concept better.
As one can observe, the upper white line connecting the three lower price points represents a trend line. It denotes a downtrend, which means that the stock's price has been decreasing over a certain period.
Example #2
Given below is the Carborundum Universal Ltd stock price chart.
The upper black straight line passing through the higher price points denotes an uptrend, which marks the increase in stock price over a specific duration.
For more such charts showing trend lines, one can visit TradingView.
Graph
Besides knowing the different trend line types, one must be familiar with its graph to understand the concept.
The gradual price reduction since August 25 shows that the financial asset is a downtrend. One can spot such trends by looking for lower and lower highs. This indicates that the market participants are keen on selling the asset instead of buying it. When one spots such a trend, they must not enter a long position as they are likely to incur significant losses.
Trend Line Breakout
A breakout occurs when a financial asset’s price moves beyond a clearly defined support or resistance level with increased trading volume. It indicates that a change in the trend is forthcoming.
Individuals must note that if a low volume is associated with a breakout instead of a high volume, it indicates that the trend reversal signal is weak. In such a case, one may consider waiting 1-2 days to check if the breakout is legitimate.
For professional-grade stock and crypto charts, we recommend TradingView – one of the most trusted platforms among traders.
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Frequently Asked Questions (FAQs)
One must follow these steps to add a trend line in Microsoft Excel:
- First, individuals must choose a chart to which they wish to add the line.
- They must click on the design tab and click on the ‘Add Chart Element’ option
- Next, they need to choose the trend line type that they wish to add to the chart
Yes, many technical analysts utilize such lines to spot the historical trend of an asset's price movements. Moreover, these lines can help a trader better define the limits of a range-bound market. That said, one must ensure not to trade on an unconfirmed trend line, a diagonal line connecting two price points.
No, such a line can be curved, for example, the polynomial trend line. One may use it when the data fluctuates.
Typically, it signifies a continuous increase or decrease in a financial instrument’s price over a certain duration.
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