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Stocks Technical Analysis Trendlines
Definition
Technical analysis is built on the assumption that prices trend. A trendline is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance.
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Figure 4.17: Uptrend and downtrend lines.
An uptrend line (figure 4.17) has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as closing prices remain above the trendline, the uptrend is intact.
A break below the uptrend line indicates a change in trend for the period being considered. In LOCKIT a stock price closing below the uptrend line is a selling signal.
A downtrend line (figure 4.17) has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as closing prices remain below the downtrend line, LOCKIT considers the downtrend intact.
A break above the downtrend line indicates a change of trend for the period being considered. A price closing above the downtrend line is a buying signal.
One or more big up or down bars at a reversal point (figure 4.18) may be the reason that it is difficult to draw a new trendline from the highest or lowest point.
Figure 4.18: Trendline with big bar at the reversal point.
In the chart, you mostly will see a sharp V-pattern or, at least, that the last up- or down-move was very big, eventually with a bigger window (figure 4.19).
Ninety-nine percent of the time, the move that follows will not be as steep as the new trend start.
In these circumstances, the new downtrend or uptrend line will have to start with one of the previous or following bars, or at some previous support or resistance level.
A 20 period’s exponential moving average or a last pitchfork is generally a good indication for the expected trendline inclination.
Figure 4.19: V-reversal pattern.
Technical Analysis Trendlines Next -Part 1 -Part 2 -Part 3 -Part 4 -Part 5
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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.
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