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 highly 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
will 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 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 might 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 4 or 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. More often, 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 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 to be flexible and redraw trend lines
when necessary.
Using High/Low or Close/Open
Often the differences in drawing trend lines depend on whether the
high and low prices are used or whether the closing and opening prices
are used to determine the line. On a candlestick chart, the question
becomes using the wicks of the candlesticks instead of the solid bodies
of the candles only.
dsd
