Monday, 5 March 2012

Trend Line

  • Trend Line is a straight line that connects >= 2 price points and to act as a line of support or resistance in future 
  • It help to identify & confirm a trend
  • Uptrend line - positive slope and connect >=2 low points where the second low is a higher low
  • Downtrend line - negative slope and connect >=2 high points where the second high is a lower high
  • Once line break, trend will be reversed
  • Use semi-log scale when we draw the long term trend lines which have a large change in price
  • Can ignore one or two points to create a fitted trend line as highs or lows might be out of whack, the angle might be too steep or the points might be too close together
  • Trend line might produce false signal, e.g. below  uptrend line was touched 4 times, and seemed to be a valid support level. Even though the trend line was broken in Jan-00, the previous reaction low held, and did not confirm the trend line break. In addition, the stock recorded a new higher high prior to the trend line break.

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