Trendlines - An Introduction

If you have looked at the price activity in a stock or market chart you may have seen lines drawn from one price point in time to another and so on from there. Trendlines are aptly named as they help to define the range of price activity that a stock or market is exhibiting during the duration of that trend. If you look closely at such a chart you will begin to see where price intersects at or near this line perhaps more than once over the course of time. A trendline is a kind of connect the dots attempt at uncovering price activity within a trend which will eventually reveal price activity that will breakout of its range. If you are looking at a daily chart you will see this more frequently than when looking at a weekly or monthly chart.

Trendlines are simple expressions of the price points of intersection, much like a mathematical formula. It is said that math can be used to express all things in nature. Music has its melody which is expressed in mathematical equivalents. All things in our physical world can be expressed in dimensional forms. So too can a stock or a given market. Trendlines lines help to ascertain where and when a stock or market will break out into higher territory or break down in price. Trendlines are one simple way to gauge the relationship of price, in time, to price and timing.

Most investors know of the maxim buy when a stock or market is making higher high's and higher lows. This indicates strength within the security or market. The reverse is also true that one should sell lower highs and lower lows. This indicates weakness within the security or market. Trendlines can easily help solve the puzzle of market strength or weakness in relation to other price activity that has taken place before it and where in time and price that the trendline may become important again.

Professional investors use charts and its price activity to help them gauge the activity of other professional investors/speculators and to identify stocks that are being accumulated or sold. Trendlines help us formulate a plan to gauge when that demand on the buy side or lack of demand on the sell side becomes an important part of an entry (buy) or exit (sell) strategy.

There are lateral or horizontal trendline breakouts that occur and there are sloping trendline breakouts either of the ascending or descending type. There are trendline's that we begin from a bottom and there are trendlines that we begin from a top.

A trendline once drawn will continue to the next top or bottom pivot point or high or low in price. For the sake of simplicity, high prices are usually connected to high prices and low prices are usually connected to low prices to form the trendline channel. There it will intersect with the high or low and continue on. These intersections at price form the foundation of a trendline or trend. A trend is the continuation of a price pattern in a given direction. The range of that price pattern will vary significantly from security to security or market to market.

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