Internal Trendlines

To complete our discussion on lines for the moment, you should know that some analysts develop a good eye for drawing internal trendlines. These are not like regular trendlines, which can be drawn by anyone following the simple rules of connecting the high or low points. Instead, internal trendlines rely on you looking at the chart and visualizing how you can connect high and low points with a straight line. These can literally be placed anywhere across the price action, and their drawing is very subjective.

The principle of the internal trendline is that you find a position for the straight line that connects as many high and low points as possible. If you cultivate an eye for spotting such conjunctions, then you are rewarded with a trendline that may provide some interesting support or resistance action in the future. The validity of the internal trendline is more easily proved in retrospect than in advance, but it is another interesting analytic tool.

Summary

  • A trend is simply the direction of the market
  • The trend direction may be up, down, or sideways
  • An uptrend has higher highs and higher lows; a downtrend has lower highs and lower lows; a sideways or ‘trendless’ trend has horizontal price action
  • Trends can be broken down into smaller parts – major, secondary, and minor trends are generally recognized
  • Support is a low point, where buying interest is sufficiently strong to overcome the declining price
  • Resistance is a high point, where selling interest is strong and prevents the price going higher
  • Once broken, support or resistance can reverse its role
  • Whole numbers are likely places for prices to stop
  • An up trendline can be drawn under rising lows in an uptrend
  • A down trendline is drawn over falling highs in a downtrend
  • Three points are needed to make a valid trendline
  • A trendline provides an indication of future support or resistance levels
  • Once broken, a trendline can reverse its role
  • Trendlines should be adjusted or redrawn as price activity demands
  • A channel line is drawn parallel to the trendline, and includes all price activity in the trend channel
  • Failure to reach the channel line may be an early indication of a trend breakdown
  • Retracement targets are 33% to 38%, 50%, and 62% to 67%
  • Speed resistance lines split the current up or down trend into thirds, providing price targets
  • Fan lines may be drawn from the start of the trend to the peaks or troughs; or to 32% and 68% for Fibonacci fan lines; or to eighths for Gann lines
  • The aim of all these line drawings is to provide price targets that may be support or resistance points

At the end of each module there is a quiz. You can take a quiz at any point, but we suggest you view each module before taking the quiz. When you’re ready to start the quiz, click the take quiz ‘Start’ button below -:

The Masters Certificate in Technical Analysis - Module 3

Questions – Module 3
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