How To Draw Trendlines

Trendlines allow a trader to stay on the right path and also determine when the path has changed. 
There is some subjectiveness to how a trendline is drawn but the main thing is there needs to be two points that have a linear relationship.  You need to be able draw a straight line.

Why Draw A Trendline?

Trendlines offer a way to know when the price is going to continue up or where the trend might reverse.

It is easy to spot an uptrend because when it  begins the line you draw  will connect the higher lows.  You need at least 1 one higher low.



You can see that as the line is drawn it is progressing up and connecting the next higher low and in this case it connect 2 other points making this a strong trendline.  Each pullback to the line offers a good opportunity to establish a position.

Downtrends we are looking for the same relationship except the stock will be creating lower peaks each time it moves down.



In this down trend we can draw a straight line through a couple of points and as you can see in late August and September it barley pops above the trendline.  Just because a stock breaks that line that you drew, does not mean that all of a sudden the stock is going to tank!

One of the attributes of a trendline is that once it breaks it can form support or resistance on that trendline.



The example of the Energy ETF (XLE) shows that in the down trend after the trendline is broken it found support after it pulled back.  In the uptrend after it breaks the trendline it rallies and it forms resistance and then has been falling since.

Stocks can have multiple trendlines within a trend.



Sometimes trends can have a very steep angle and they can break quickly and fall back to a trendline that is less steep.  For short term traders the steeper line may offer a quicker trade where the longer trendline offers a longer time frame for a trade.

Some Things to Think About When Drawing Trendlines

1. The more touches a trendline has the more relevant the trendline, but it needs at least 2 points and 3 to make it valid.
2. The steeper the trendline the quicker it may break
3. When a break of a trendline occurs in a downtrend it may form support, in a break of an uptrend line it may form resistance.

I personally love trading trendlines and the best way to get good at them is draw them a lot, of course they are not perfect but they offer a tool that allows a swing trader to identify ideal points to get into a trade.