- What is a trend?
- What is a trendline?
- How to not draw a trendline?
- The correct way to draw a trendline
- What is merger or confluence of trendlines?
- Indicators you can use along with trendlines to place early trades in the markets
- The advanced version of trendlines: Curved trendlines
What is a Trend?
A trend is a direction in which the share price is moving. There are three types of trends.- Uptrend
- Downtrend
- Sideways trend
- If a stock consistently hits high peaks and high troughs, it is said to be in an uptrend.
- If a stock consistently hits low peaks and low troughs, it is said to be in a downtrend.
- If a stock makes flat peaks and troughs, it is said to be in a sideways trend.
What is a Trendline?
As the name suggests, a trendline is a line which indicates the trend or the direction of a stock. It is drawn by joining three or more points on a chart. With the help of this trendline, you can easily analyse whether the stock is in an uptrend, downtrend or sideways trend. Now, the most common mistake people make while drawing a trendline is that they follow the basic rule of geometry and draw a line with the help of two points. But, when we draw a trendline, we must always look for a third point which will validate the trendline. Confusing? Don’t worry. Let’s simplify this with the help of an example.So, what is the correct way to draw a trendline? Let’s find out.
Recommended watch: The right way to draw trendlines
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Let’s take a look at how to draw a trendline when the stock is in a downtrend.Recommended watch: Volume analysis in the stock market.
Another important point to note here is that you should never try to force a trendline which is hard to identify. You must draw the most obvious line to which the share price reacts the most. Let’s move ahead and understand the merger of tendlines.What is merger or confluence of trendlines?
As we just saw, a trendline acts as a support and resistance. But apart from this, there is another big advantage of drawing a trendline. We all know that the share price fluctuates according to the demand and supply of shares. So, when two or more key trendline levels intersect each other at a point, it is called the merger or confluence. This merger acts as a very crucial point from which either the stock will see high demand or high supply. Take a look at this example.- A support or a resistance level intersects the leg line or the horizontal line on a chart.
- Intersection of two trend lines or channels, one ascending and the other descending.
Indicators you can use along with trendlines to place early trades in the markets
Now, there are many indicators which you can use along with trendlines to place early trades in the markets. In technical analysis we have various indicators which are used along with trendlines such as rate of change indicator (ROC), Relative Strength Index indicator (RSI) and a lot more. But among all the indicators RSI is one such indicator which can help you analyse how strong the current trend of a stock is. Moreover, it also indicates if the trend is going to reverse with the help of RSI divergence.Recommended reading: What is Relative strength Index indicator (RSI)? So, along with the trendline if you use an indicator such as RSI, it will help you analyse how the trend is going to perform next with the help of divergence for short term trades as well as long term trades.What is RSI divergence?
Usually, the RSI Indicator moves in synchronisation with the stock price. So, when there is an upward trend, the RSI would move upwards and vice versa. But sometimes, you might come across situations where the stock price is moving up but the RSI is moving down. It indicates that the strength of the trend is weak. Take a look at this example.Bottom line
Trendlines are essential and a very basic tool which you must master before you start trading. Learning to draw trendlines is indeed a skill. But, you must also have the ability to predict a strong trendline and a weak trendline. A strong trendline is a line where the share price bounces back when it touches the trendline. A weak trendline is the one which constantly has false breakouts and most often the stock price fluctuates above and below the trendline. Also remember, when the share price breaks the trendline, it is recommended that you must use tools such as RSI to predict the next market move. We hope you found this guide on trendline trading helpful. To learn more about technical analysis you must check out our playlist on technical analysis. Open a FREE Samco Demat account today and use your knowledge of trendlines to make big money in the stock markets.Happy trading
What a beautiful series Apurva sir thanks best trading platform is samco no doubt in that nd learning videos is also qwality one..