A trend line is formed when we can draw a diagonal line between two or more price pivot points. These are commonly used to judge entry and exit investment timing when trading securities. It can also be defined to a “Dutch line”. A trend line is a bounding line for the price movement of a security. A support trend line is formed when a securities price decreases and then rebounds at a pivot point that aligns with atleast two previous support pivot points. Similarly a Resistance trend line is formed when a securities price increases and then rebounds at a pivot point that aligns with atleast two previous resistance pivot points.
A support level is a price where the price tends to find support as it is going down. This means the price is more likely to “bounce” off this level rather than break through it. However, Once the price has passed this level, by an amount exceeding some levels, its likely to continue the dropping until it finds another support level. Trend lines are the simple and widely used technical analysis approach to judging entry and exit investment timing. Historically, trend lines have been drawn by hand on paper charts, but its more common to sue charting analysis that enables trend lines. When establishing trend lines it is important to choose a chart based on a price interval period that aligns with your trading strategy.
Trend lines are typically used with price charts. However they can also be used with a range of technical analysis charts such as MACD, RSI. Trend lines can be used to identify positive and negative trending charts, whereby a positive trending chart forms an up sloping line when the support and the resistance pivot points are aligned, and a negative trending chart forms a down sloping line when the support and resistance pivot points are aligned.
Trend lines are used in many ways. If a stock price is moving between support and resistance trend lines, then a basic investment strategy commonly used by traders, is to buy a stock at support and sell at resistance, then short at resistance and cover the short at support. The logic behind this is that when the price returns to an existing principal trend line it may be an opportunity to open new positions in the direction of the trend, in the belief that the trend line will hold and the trend will continue further. A second way is that price action breaks through the principal trend line of an existing trend, the trend may be going to fall, and a trader may consider trading in the opposite direction to the existing trend, or existing positions in the directions of the trend.