Using Trendlines

Trendlines can be the most basic of all technical indicators. A trendline is exactly what it sounds like: a line on a chart that shows the general direction a stock is trending. If a stock is moving up in price, its trendline slopes upward from left to right. If a stock is trending down in price, its trendline slopes downward from left to right.

In this section, you discover how to draw a trendline on a chart. Also, some hints on how to determine the direction (up or down) are given. Finally there’s a quick overview of how machines (a computer) can draw trendlines for you.

Drawing trendlines

Trendlines seem pretty straightforward, but drawing a trendline can be tricky. Based on how you think a stock is performing, you draw a line of support (in a bullish case) or a line of resistance (in a bearish case).

You can construct a trendline with nothing more than a printed out chart, a ruler, and a pencil. If you can’t find a ruler, just close this book and use the spine. Anything that allows you to draw a straight line between two points will do. To draw a trendline, simply draw a line that connects two or more low price points (for an upward trending line) or two or more high price points (for a downward trending line). Figure 11-1 shows a prime example of a trendline.

Don’t let the ease of trendline construction fool you into thinking that trendlines are simple ...

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