Tips on Technicals - Trend Lines
Indicator type: |
Trend line |
Used to: |
Identify market direction and provide moving support and resistance |
Markets: |
All cash and futures, not options |
Works Best: |
All markets and time frames |
Formula: |
N/A |
Parameters: |
N/A |
Theory: |
Trend lines are usually drawn from the start of the move through the end of the first significant retracement. Parallel trend lines are often used to create a channel of support and resistance around a price move.
Trend lines can be applied over any time frame from a few minutes to a few years. Since each time frame's trend is independent of the others, it is possible to have an upward short-term trend (rally) in a declining long-term trend.
Not all markets trend higher or lower. At times, any market can trade laterally and its trading activity is called trendless. Fitting trend lines to it is ambiguous at best. Traders wait until a trend establishes itself before taking action. Options traders may take advantage of the lack of price movement by writing options strategies that profit if the market stays where it is.
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Interpretation: |
Trend lines provide support and resistance for the price trend. For example, in an uptrend, a supporting trend line is drawn from the start of the rally through the subsequent shorter-term troughs. The market makes higher lows as it touches this line. The more times it touches the line, the more powerful the trend line becomes and the more significant a violation (price move below the line) becomes. |

In the chart above, the peak in the continuous IMM Canadian Dollar future (200 weeks) was set in late 1991. Since a declining trend line provides resistance, it should then be drawn from that high, to the high of the retracement rally, which was in early August 1992. The trend line is extended lower as time goes on. As can be seen in the chart, this trend line has resisted all counter trend rallies up until the end of the chart. Just as with support and resistance levels, the more times the market touches them, the stronger they become. Further, the stronger the trend line, the more significant the signal when the market penetrates it.