- Trend Lines
- Price Channels
- Linear Regression
- Trend Line Degrees
- Speed Lines
Trend Lines
- Trend lines are an important tool in technical analysis
- Technical analysis is built on the assumption that prices trend
- Trend lines used for trend identification and confirmation
- Used to signal when a trend is changing
Uptrend Line
- An uptrend line has a positive slope and is formed by connecting two or more bottoms
- Two points make a tentative trend line while three or more make a valid line
- The more it has been tested and the longer it remains intact, the bigger the significance of the trendline
Downtrend Line
- A downtrend line has a negative slope and is formed by connecting two or more tops
- Two points make a tentative trend line while three or more make a valid line
- Two points make a tentative trend line while three or more make a valid line
Trend Line Degree
- Steepness of a trend line is important
- A trend line which is too steep indicates that the rate of ascend is not sustainable
- A trend line that is too flat indicates that the uptrend is weak and may not hold
- Most valid trend lines show a slope of 45 degrees
Break of an Uptrend Line
- As long as prices remain above the trend line, the uptrend is considered solid and intact
- A break below the uptrend line indicates weakness in the trend
- A close below the trend line is more significant than just an intraday penetration
- Price filter – percentage drop below the trend line
- Time filter – one or more closes below the line
Break of a Downtrend Line
- As long as prices remain below the trend line, the downtrend is considered solid and intact
- A break above the downtrend line indicates a weakness in the downtrend
- A close above the trendline is more significant than just an intraday penetration
- Price filter – percentage move above the trendline
- Time filter – one or more closes above the line
Price and Time Filters
- The 3% rule is a long term price filter for stocks that outlines a close beyond the trend line by 3%
- The 1% rule is a short term price filter for stocks that outlines a close beyond the trend line by 1%
- For forex and commodities we use 1% for long term charts and 0.3% for short term charts as these securities are less volatile
- The 2 period rule is a time filter that outlines a close of two consecutive candles beyond the trend line
Adjustment of Trend Lines
- Breaking of a steep trend line suggests the need of a deeper correction
- A new trend line may prove to be more sustainable
- A flat up trend line may prove to be too slow
- A steeper trend line is redrawn to closely track prices
The Fan Principle
- After a break of an uptrend line, prices might fall for a while and then rally up to retest the trend line
- A second uptrend line can be drawn through the new trough
- Break of the second trendline indicated further weakness and allows the drawing of a third line
- The breaking of the third trend line signals a valid trend reversal
- After a break of a downtrend line, prices might rise for a while and then drop to retest the trendline
- A second downtrend line can be drawn through the new peak
- Break of the second trend line indicated further strength and allows the drawing of a third line
- The breaking of the third trend line signals a valid trend reversal
Bullish Price Channel
- The return line is a line drawn parallel to the Uptrend line, drawn along the tops
- The lines form a channel, and prices are expected to move between the two parallel lines
Bearish Price Channel
- In a downtrend , the return line is a drawn parallel to the downtrend line along the bottoms
- The lines form a channel, and prices are expected to move between the two parallel lines
Linear Regression Channel
- An easy way to draw channels is by using the Linear Regression Channel
- Linear regression line is a line that best fits all data
- Drawn always from left to right
- In a downtrend drawn from the ATH to the ATL
- In an uptrend drawn from the ATL to the ATH
- The Linear Regression Line goes through the middle of the candles serving as an average
- Upper Channel Line: A line parallel to the Linear Regression Line
- Drawn one or two standard deviations above the Linear Regression Line
- Lower Channel Line: A line parallel to the Linear Regression Line
- Drawn one or two standard deviations below the Linear Regression Line
How to Use Channel Lines
- As long as prices advance and trade within the channel, the trend is considered bullish
- A break above return line resistance would be bullish and indicate an acceleration
- The first warning of a change in trend occurs when prices fall short of the return line
- A break below the trend line support would provide further indication of a change in trend
- As long as prices decline and trade within the channel, the trend is considered bearish
- The downtrend line acts as a resistance area and provide selling opportunities for traders
- The return line acts as a support zone and can be used for profit taking
- The return line acts as a support zone and can be used for profit taking
- A break above the trend line resistance would provide further indication of a change in trend
Trend Lines of Different Degrees
Trend lines of different degrees can be drawn
- Major trend lines
- Intermediate trend lines
- Short term trend lines
Speed Lines
- Measure the vertical distance of the trend
- Draw first line at two thirds of the distance
- Draw second line at one third of the distance
- Speed line measure the speed of a trend
- Act as support and resistance lines
