How To Correctly Draw Trend-Lines To Assess Breakouts
Trend-lines are the most fundamental skills of anyone performing the technical analysis of charts.
As a certified market analyst, you are taught how to draw trendlines properly, this is the quick guide to doing it right.
There are 3 time-frames for trends according to Charles Dow the father of technical analysis and the Dow Jones Industrial average. 3 Trend Timeframes • Short-term: Days to Weeks • Medium-term: Weeks to Months • Long-term: Months to Years 3 Types of Trend • Uptrend • Down Trend • Sideways Consolidation
The secret of trend-lines is combining these 6 factors to assess market direction.
Looking at the NVIDIA chart I have plotted key trendlines and the expected direction once price breaks through or bounces off a trendline. 4 Trends on the NVIDIA Chart 1. The long-term trend – Uptrend By connecting the lowest lows (closing price) on a price chart we can easily see that NVIDIA is in a long-term uptrend. As this trend spans from 2016 through 2020 (months to years) it is a long-term trend. 2. The medium-term trend – Sideways Connecting the highest highs for NVIDIA from 2019 to 2020 (weeks to months) we can see that NVIDIA is in a sideways consolidation pattern. Here you can see that trend-line (2.) is also called the resistance line. The price bounced twice off the resistance line but did not break through, meaning resistance. Also, in terms of the chart pattern, it is a “double top”. 3. The Short-term Trend – Downtrend Looking at the days to weeks timeframe and connecting the highest highs of the closing prices we can clearly see that NVIDIA is in a downtrend. 4. Long-term lateral support line Here we can draw a horizontal line connecting previous highs and lows to see there a possible future target price may be.
Using Trend-lines to Establish Possible Price Direction Now that we have drawn the trend-lines we can see that if price breaks through or bounces off a trendline what the next market move will be. Predictions are colored in Red. 5. Price Breaks Through Long-term Trend Line If the stock price breaks down through the long-term price trend (1.) then we expect it to move down to trend-line (4.) at $120 6. Price Breaks Up through Short-term Down Trend If price breaks up through trend line (3.) Then we expect resistance at the Medium-term trend line (2.) At this point, it will either move back down to continue up. 7. Price Breaks through Medium-term Trend 2. Finally, if the price moves up through medium trend (2.), this is a new all-time high and a bull run.
Summary I hope this guide shows you how to draw trend lines properly to give professional reliable results and market entry timings.