Technical Analysis is based on the Theory that “Stock Prices Trend”. Trendlines are an important tool in the Day Trader’s tool kit. Trendlines are used for Identification and Confirmation of Stock Trends. A Trendline is a straight line drawn connecting minimum two price points. However, it is recommended to connect at least three price points for confirmation of the Trend.
How to draw a Trendline
As Day Trader’s we live and exist on Daily hourly charts. We use 1 min chart for Trading and 5 min chart for Trending. Trendlines illustrate the direction of the Market and this is the primary consideration of any analysis. As we can say that the market can move in more than one direction, we can make the following statement, which applies in drawing trendlines.
Uptrend consists of successive Higher Bottoms and Higher Tops.
How to draw a Trendline
As Day Trader’s we live and exist on Daily hourly charts. We use 1 min chart for Trading and 5 min chart for Trending. Trendlines illustrate the direction of the Market and this is the primary consideration of any analysis. As we can say that the market can move in more than one direction, we can make the following statement, which applies in drawing trendlines.
Uptrend consists of successive Higher Bottoms and Higher Tops.
The above chart shows you the Trendline drawn for today’s NSE Intraday Chart. We can see the Clear Uptrend by making successive Higher Bottoms. The Uptrend Trendline represents a major support for the stock price, while considering an Intraday Chart for any stock. The trend continues until it is broken. I have circled the Break in the Trend, which shows that the Market is changing its direction. As day trader, we trade in Two Types of Trend, an uptrend and a downtrend. Identifying the trend and identifying the change in trend will make our trading positions to be more profitable.
We have now learnt to Identify and confirm the uptrend; we have also learnt to identify the change in trend. We will now see how to identify the downtrend and confirm the same.
Downtrend consists of successive Lower Tops and Lower Bottoms.
The above chart clearly explains the downtrend and confirms the downtrend. As you can notice in this chart that the downtrend is established and achieved in a very short duration, the downtrend becomes evident, then confirmed and trend changes immediately within 30 to 45 min. In these kinds of situations, the trendline will show us, the trend as and when it happens, if you notice it correctly and act accordingly, you make a good amount of profit on the short side. We made good Shorting profits in this down trend.To draw a Trendline in a Downtrend, you have to connect successive higher tops, as shown in the above chart. The Price breaks the Trendline (marked with blue circle) and indicates the change in Trend.
Trading with Trendline
For Day Traders, it is not recommended to use Trendline as a Standalone Trading Method. We use Trendlines to find the Trend for Suitable Long or Short Positions. When the Trend line is broken, we check some other indicators, which will be discussed in future, in order to confirm the change in trend and change the trading positions.
Insight
Trendlines can offer great valuable insights, if this is used improperly, this can give false signals, which will turn your trade into losses. While trendlines have become popular tool in technical analysis, they are merely a tool to identify, analyze and confirming a trend.
Trendline should not be a final trade decision maker. However, they should serve as a Early Warning System for a Trend change in near future. By using Trendline breaks, Day Traders can closely observe to other confirming signals to confirm the change in trend.
Thank you for joining us in this Technical Analysis discussion.
Happy Trading!
Day Trading Analyst Team
