Chapter 11 – What are Trend Lines?

What are trend lines?

  • Tops show where bulls run out of steam, bears take control.
  • Bottoms show where bears run out of steam, bulls take control.
  • Shows psychological points of crowds in the market.
    • E.g. turning points, direction of movement.
    • Provides support or resistance.
  • Oldest, most basic, yet very important in technical analysis.
  • Can be drawn on prices, volume and even oscillators.
  • Easy theory, yet confusing applications.
    • Much experimentation and practice before mastering.
  • Theory
    • Connect two or more tops or bottoms.
Trend lines connect top to top, bottom to bottom

Trend lines connect top to top, bottom to bottom; example of uptrend

    • Up-sloping trend line (TL) connect final low with the first higher bottom in a rally.
    • Top to top – resistance TL.
    • Bottom to bottom – support TL.

 

Trend lines connect top to top, bottom to bottom; example of downtrend

Trend lines connect top to top, bottom to bottom; example of downtrend

    • Down-sloping trend line connect final high with the first lower top.
    • Top to top – resistance trend line.
    • Bottom to bottom – support trend line.

 

Drawing trend lines in a ranging situation

Drawing trend lines in a ranging situation

    • Flat or near to flat sloping trend line – connect top to top, bottom to bottom.
    • Can be horizontal line.

 

Chapter 12 – Drawing Trend Lines

Drawing trend lines

  • Practice, practice, practice – this is the tip!
  • What type of price charts?
    • Bar chart, candlestick chart or line chart?
  • Timeframe
    • Weekly, daily?
    • Depends on your investment/trading timeframe.
    • Always check back with the next larger timeframe.
  • Closing prices or high/low prices?
    • Closing prices.
      • Show the price that crowd are willing to take home.
    • Edges of congestion areas.
      • Show where majority have traded.
    • Extreme highs/lows/
      • Extreme bulls/bears, an action of over-stretched bulls at tops, over-stretched bears at bottoms.
  • Trend line don’t touch all points? Some prices jutting out?
    • Prices fall out of trend line due to extreme prices.

 

Apply common sense as much as strict technical analysis rules.

Fit the first two visible high/low points. If this trend line ‘runs out’, take next high/low point to connect with the subsequent high/low.

Practical Technical Analysis by TerraSeeds 2006 Course Material Page 41

Practical Technical Analysis by TerraSeeds 2006 Course Material Page 41

 

Special guide

 

Slope of trend line

  • Up-sloping – bulls in control, long position.
  • Down-sloping – bears in control, short position.
  • Steep-sloping gradually becomes gentle-sloping trend line suggests weakening in the underlying trend.

 

Chapter 13 – Determining importance of Trend Lines

Determining importance of trend lines

  • Longer the timeframe, more important and more valid the trend line.
    • Trend line in weekly chart identifies more important trend than a daily time frame.
    • E.g. Trend line extends 2-3 years will result in bigger signals than trend line over 3-6 months.
  • More contacts between prices and trend lines, more valid it is.
    • Each touch or very near touch shows strength of this support/resistance.
    • Thereby showing strength of underlying trend.
  • Angle of ascent or descent.
    • Sharp trend difficult to maintain, likely to be violated more quickly.
    • Would likely to result in a short corrective move, and resume trend at more gradual pace.

 

Chapter 14 – Support and Resistance

Support and Resistance

  • Simple, effective, very important, communication often confusing.
  • SAR represented by a horizontal or near-horizontal line.
  • Support
    • Price level where bulls are strong, buying is strong.
  • Resistance
    • Price level where bears are strong, selling is strong.
  • Before you trade, get all your support and resistance levels.
  • Use this to manage your risk.
  • Support and resistance exist because people have memories.
    • Prices have stopped falling and reversed up from a certain level → tend to buy or stop selling near that level.
    • Prices have stopped rising and reversed down from certain level → tend to sell or stop buying near that level.
Support and resistance levels

Support (bottom) and resistance levels

 

  • Support and resistance exist because people feel pain and regret.
    • Traders with losing position want to get exit position if market gives them a chance.
    • Traders who missed opportunities feel regret and wait for the market to give them a chance to buy/sell.
Support and resistance are interchangeable

Support and resistance are interchangeable

Technical analysis works on probabilities but there are “rules” to follow

Mantra for support and resistance levels

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