6. Trend Lines

Trend Lines

Trend lines are probably the most common form of technical analysis. They are probably one of the most underutilized ones as well. If drawn correctly, they can be as accurate as any other method. Unfortunately, most traders don't draw them correctly or try to make the line fit the market instead of the other way around. In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys). In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

How do you draw trend lines?

To draw trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

What's next?

Nothing.

Uhh, is that it?

Yep, it's that simple.

Here are trend lines in action! Look at those waves!

Types of Trends

There are three types of trends:

1. Uptrend (higher lows)


2. Downtrend (lower highs)


3. Sideways trends (ranging) 
   

   Here are some important things to remember about trend lines:

4. It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.
5. The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.
6. Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.
7. And most importantly, DO NOT EVER draw trend lines by forcing them to fit the market. If they do not fit right, then that trend line isn't a valid one!

   Follow the trend for profitable trading

   Advantages: By following the trend, you will not be affected by: - Performance of companies - EPS, PE, RONW and other ratios - Elections, budgets, GDP - FII inflows, crude oil prices - Interest rates and inflation - Newspaper reports and analyst talks - Intra-day fluctuations and volatility

   The easiest and safest way to earn excellent profits consistently is to simply follow the trend and trade.
   By following the trend, you will always be on the "right" side of the market. Trend analysis helps distinguish emotional decisions ("I think it's time to sell...") from analytical decisions ("I will hold until the current rising trend is broken"). Trend analysis will also discourage you from going short in a bullish market or going long in a bearish market.

   What is a trend

   A trend is simply, the persistence of a security's price to move in a particular direction. A trend can be bullish, bearish or flat. Also, a trend is in effect till it is reversed. Markets are either bullish, bearish or flat. However markets never go up or down in a straight line. There are always corrections (in bullish markets) and pullbacks or relief rallies (in bearish markets). By identifying trends and reversals, you can enter and exit trends at the correct time and earn excellent profits with minimum risks.