Strength of the Line
Just as with support and resistance, you can consider the trendline more or less significant depending how well it has stood up over time. The longer it has been acting as a support or resistance level for the current trend, the more it can be relied upon. Another gauge of the strength of the trend line is how many times it has been tested, that is touched, and withstood against penetration. If the trend line is well-established, then the more it can be trusted to hold up, and the more significant event it is if and when it is broken.
Getting All the Action
By the way, the standard way to draw trendlines is to include all the trading action, whether the low point for the day or weekly candlestick is transitory or not—you may find some analysts drawing the trendline using only closing prices, arguing that these are the most important prices for the day, but it’s more common to take into account all the trading activity. Sometimes it makes a difference, although you shouldn’t worry about the odd pence or cents either way.
Using the Trendline
Once you have a verified trendline drawn it can be very useful. As noted in the Dow Theory, trends tend to continue until something major happens to stop them, which means that you should generally expect the price action to continue in the same uptrend, using the trendline as a support. In fact, once the uptrend has established itself as a certain rate of increase, or slope, you usually expect it to maintain the same angle.
The first basic use of the trend line is to see where you can buy in an uptrend, as you can expect the price to come down and touch the line during corrections or retracements, before going back up again. The line provides a support for the price. In a downtrend, the opposite applies, the trendline is a resistance and you may choose to go short when the price goes up to touch it on a retracement.
Join the discussion