Trend lines are lines that are drawn along either peaks (rally, highs) or troughs (dips, lows).
Trend lines are simple yet very effective technical analysis tool. Learning to draw correct trendlines pays off in many ways. It is pretty simple on smooth market price movements. The only prerequisite to drawing any trendlines is the presense of a trend. Once the trend - an uptrend or downtrend, is in effect we can draw trendlines.
To draw an up trendline, there must be two reaction lows with the second reaction low higher than the first one as shown in the figure below. So up trendlines are drawn straight to the right along successive reactions lows.
In the above figure, points 1, 3, and 5 are reaction low points. Also reaction low at point 3 is higher than the reaction low at point 1. And reaction low at point 5 is higher than the reaction low at point 3.
To draw a down trendline, there must be two reaction highs with the second reaction high lower than the first one as shown in the figure below. So down trendlines are drawn downward to the right along successive rally peaks or highs.
In the above figure, points 1, 3, and 5 are reaction high points. Also reaction high at point 3 is lower than the reaction high at point 1. And reaction high at point 5 is lower than the reaction high at point 3.
So far, all the trendlines that we have drawn are tentative trendlines. A tentative trend line becomes a valid trend line when it is touced a third time with prices bouncing off of it.
In the figure A, a tentative up trendline was drawn when two reaction lows at point 1 and 3 were formed. And the successful test of the up trendline at point 5 confirmed the validity of this trendline.
Figure B shows a down trendline, but the same rule applies.
In summary, two points (either two reaction lows in the case of an uptrend or two reaction highs in the case of a downtrend) are needed to draw a tentative trendline. If and only if the price tests the tentative trend line at the third point and bounces off of it then and only then the trend line is confirmed to be a valid trendline.
