Chapter 10

Drawing Trendlines

In This Chapter

Getting to know the price chart

Figuring out trends

Knowing about rule-based trendlines

Acquainting yourself with internal trendlines

Often you can see a trend with the naked eye, but to impose order on your visual impression, you can connect the dots, so to speak, by actually drawing a line along the price bars. A trendline is a straight line that starts at the beginning of the trend and stops at the end of the trend. You can do this the low-tech way by using a piece of paper, a ruler, and a Number 2 pencil, or go high tech with software like Excel or special charting software. Figuring out where trends start and stop can be complicated, but in this chapter, I explain how to spot them, plot them, and figure out what they’re telling you.

Looking Closely at a Price Chart

Sometimes a trendline pops out when you look at a chart. The price is moving in a consistent fashion, either up or down. Usually your eye directs your hand to draw a trendline — but then you see another one that may be more representative. You may find yourself frustrated at this situation and be tempted to give up. Persevere for two reasons:

You can feel a higher level of confidence that your trade is the right one when prices are following your trendline.

A break of a trendline is a high-probability indication that the trend has ended and you need to take action.

You never know in advance when a trendline should start or stop. You know only after the fact. So a ...

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