How to Draw Your Trend Lines

The trend is the most important concept in technical analysis.

Its strength or weakness can dictate the overall direction of your favorite stock or index. Potential uptrends can be characterized by a series of higher highs. Potential downtrends can be characterized by lower lows.

Look at the NASDAQ Biotech ETF (IBB), for example between 2013 and mid-2015.

This particular uptrend was characterized by higher highs, and a supportive 50-day. In fact, for six long years, that trend line remained intact.

Any one that took advantage of the trend as highlighted by the 50-day did well.

Or look at this chart of Shopify (SHOP) for example. We can clearly see a well-defined trend as highlighted by the 50-day moving average. In fact, it remained intact since mid-2016 through September 2017 before falling apart on a bearish report.

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Aside from the 50-, or even the 200-day moving average, charts can tell us stories, and highlight opportunity if we also draw our own trend lines. Remember, technical analysis is built on the assumption that prices stick to their trends. The direction of highs and lows begin to constitute a trend that we can then base our trading decisions on.

To draw your own lines, pull up one of your favorite charts.

Find two or more high points or two low points, and begin to connect them by drawing lines attaching the highs to each other. Then attach the lows by drawing lines, as well. As you begin to do so, patterns begin to appear.

All we want to do is identify potential areas of supply and demand with them.

To validate a trend line, we want to see the price of the asset actually react at the lines we drew at least three or more times. Once we have this, we can really begin to spot opportunities in the market. Then, as you get more comfortable, you can begin to buy at bullish and bearish reversal points.

Look at Live Nation Entertainment (LYV), for example.

Once I draw my trend line, I can make the argument that as long as it holds as support on each test of the line, it may be a buying opportunity.

Or look at this chart of Southern Company (SO).

An argument could have been made at the end of 2016 for further downside just by drawing our trend lines and exposing opportunity.

In most cases, the trend is your friend. Never ignore it. Take the time to study it. It may just lead to your next big win.

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