Downtrends and Uptrends are catching the eyes of most traders because they give a good idea of which direction the market is trending. In this article, I will teach you how to draw a trend line. You’ll also discover how to use this tool in this article. Trend lines are easily recognizable lines that traders draw on charts to connect a series of prices together. With this tool, you can draw them on your charts and increase your chances of making successful trades.
Understanding the direction of an underlying trend is one of the most basic ways to increase the probability of making a successful trade. This is because it ensures that the general market forces are working in your favor. There are many tools more traders can use to aid them in increasing their chances that a trade will go in their favor. I keep it as simple as possible, and you won’t need any fancy interactive tools to be able to follow along or learn. Just learning how to read and draw trend lines correctly will not be enough. You will have to use technical analysis with a strategy to make great trading decisions.
More about Trend lines
A downtrend line suggests that there is an excess amount of supply for the stock option. This simply translates to there is an increased supply; there is more of a willingness to sell than buy. This can be seen in the image below at the beginning of the trading day; the market was trending downwards (red candles). This also meant that the price moved lower as the red candles developed.
Also notice that a little later in the day when you see several green candles, the market reversed and trended upward. An uptrend is a signal that the demand for the stock is greater than the supply. This suggests that the price is likely to continue heading upward. Trendlines can vary drastically, depending on the time frame used and the slope of the line. For example, some stocks can show aspects of uptrend/downtrends for months, days, or even a few minutes.
If you notice also, the support and resistance levels are labeled in the diagram above as well. The general rule to follow in my strategy is to find and draw your resistance levels labeled before you start trading. Trendlines are used to recognize the levels on a chart beyond which the price of an asset will have a difficult time moving. This information can be very useful to traders looking for strategic entry levels. It can even be used to effectively manage risks involved, by identifying areas to place stop-loss orders.
Investors pay close attention to an asset when the price approaches a trendline because these areas often play a major role to determine the short-term direction of the asset’s price. As the price nears a major support/resistance level, they are two different scenarios that can happen. The price will bounce off the trendline and continue in the direction of the prior trend. Or it can move through the trendline, which can then be used as a sign that the current trend is reversing or getting weary. Some major zone areas are labeled in the diagram below to help create a visual for you.
Let’s Get Drawing
Where traders sometimes get caught up is not knowing which prices are used to create a trendline. As you know, the open, close, low, and high prices are easily obtained for most stocks, but which prices should be used when creating a trend line? The answer is there is no distinct answer to this question. Technical signals created by the various technical patterns/indicators are very particular and trendlines are not excluded. A trend line is pretty much a straight line; nothing fancy, a trend line acts as an arrow to where the market will move to.
It is the trader’s decision when it comes to choosing what method is used to create the line, and no two traders will always agree on the same points. Some traders will only connect closing prices; while others may choose to use close, open, and high prices. Regardless of what prices are being associated with one another what is more important to identify, the more prices that touch the trendline the stronger the line is believed to be.
Let’s take a look at the picture below, I have used yellow and blue lined colors to make it easier for you to keep up with me. For the baby blue color, look how many times those areas were touched; also referred to as re-tested. In yellow, I drew trend lines for you to see the direction that the market was projected to move to. The great this is that in this image you are able to see the projected area was 100% accurate. Not only did it touch, but it touched more than one time. If you had made two calls at the beginning and one put later on in the day, you would have won 3 out of 3.
Summary: How to Draw a Trend line
You have learned what trendlines are, how to identify them, and how to use this information to make successful trades. You also learned that having a playing field labeled before you step up to bat sets it key to being successful. If you don’t know where you are playing, you have no vision. Without vision, you will be headed nowhere, which translates to not making any money. Thankfully you are in the right place because with the MK VIP training program I will lay out the yellow brick road you need to follow.
The stock market can be scary, but that is because most people don’t know where to start. My goal has always been to help as many day traders achieve their personal financial goals, whether they are novice traders or experienced traders. The MK VIP training has plenty of resources to help you get started on reaching your day trading goals. With my program, you can learn how to begin day trading, and you will be profitable for at least 80% if not more of your trades. I can teach you the best strategy and the tools that if you put in the work and practice; the sky is the limit.
Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”
