Trend Line Analysis

A trend line is a straight line which connects significant tops or bottoms on a chart in order to illustrate support or resistance points.

A support line is one which connects chart lows.

A resistance line is one which connects chart highs.

A minimum of tree points are required to produce a valid trend line. I do not mean to insult your intelligence if you are already familiar with trend line (which is probably true for the vast majority of you).

Figure 12-1 shows a number of support and resistance trend lines. Although, there are no firm statistics on the effectiveness of trend line usage, Ive found trend lines to be very effective for intraday trading using 5-, 10-, and 20-minute charts.

Trend lines may be used as follows:

• Buying at support. This is a simple procedure. Once support has been established, buy when prices decline to support in an up trend. Figure 12-1 illustrates this approach.
• Selling at resistance. Also a simple method, this approach sells at a resistance trend line in a down trend once resistance has been established. Figure 12-1 illustrates this approach.
• Selling breakouts below support. Once support has been established, a decline below support (breakout down) is considered a sign of weakness, i.e., a break in the trend, and used for the purpose of selling out existing long positions or for establishing short positions. See Figure 12-2.
• Buying breakouts above resistance. Once resistance has been established, a move above resistance (breakout up) is considered a sign of strength, i.e., a break in the trend, and used for the purpose of buying back existing short positions or for establishing new long positions. See Figure 12-3.

When Determining Trend lines it is often helpful to go back several days in order to determine the location of the line. But do not get carried away by attempting to trace a trend line back several weeks using intraday data-there is no reason to do this. Several days, even one day, will be sufficient.

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