|Defining the trend using support and resistance lines|
Defining the trend using support and resistance lines
Trendlines can be one of the most powerful concepts and tools to the technical analyst when used to their full potential. In combination with other indicators, trendlines will help you clearly define the major, secondary and minor trend as well as strength of the current trend. In this months newsletter we will be covering the use of trendlines.
What is a trendline? A trendline is where an analyst has connected a series of higher highs or lower lows to help illustrate the overall movement of a chart.
Trendlines which are drawn connecting the lows are referred to as the support lines.
Trendlines which are drawn connecting the highs are referred to as resistance lines.
Trend breaks are noted when the price breaks down through the support line or up through the resistance line. After the trendline break we can see that the price does not form a new high but does have a new low. Both the trendline break, a lower high and a lower low confirms that the trend has ended.
When applying trendlines, it is important to confirm your trend. A good rule of thumb is that a new trend can be confirmed after the price has reached more than one higher high or lower low. As in the case of this chart, even though the price has breached the resistance line, the price does not hit a higher high. Waiting for the trend to be confirmed will help the trader avoid trading short term corrections or false signals generated by sideways choppy markets.
Trendlines also provide additional information about the trend when combined with certain oscillators.
To ensure that the reversal is a genuine breakout rather than a short term correction a trader should watch for an increase in trading volume. If the beginning of the new uptrend has decreasing volume the trader should be skeptical of the uptrend.