There are always a few rules of thumb to keep in mind when drawing trend lines.
2. Keep it simple, but not too simple. As tempting as it may seem, we really don’t need to draw four or five lines to get our point across. However, one trend line by itself is too simple, and only semi-useful. In most cases you will be able to find at least three or more different trend lines in the short, medium, and long-term. In the case I have too many lines drawn, I generally pick 2 or 3 that I feel are crucial and delete the rest. One trend line is acceptable in cases where you feel like the evidence lies in other indicators. These indicators can be relatively simple, such as moving averages or RSI, or semi-complex such as Fibonacci lines or MACD. Whatever the case, the idea is to make your chart helpful and useful (while also being clear and concise.)
3. A trend line should generally touch three or more points on the chart. Two is acceptable when there is a clear trend but sometimes the lows/highs get close to the line but don’t necessarily touch it. If you look for trend lines in the RSI too, it will most often be the case that there is a trend the trend lines can only connect two points without cutting through another line on the chart. As long as you get the point across, people will generally cut you some slack.
4. It is (sometimes) ok to have your drawn lines cut through the price movements. For example, I did this on the S&P chart to signify that the trend line that was previously a support line has become a resistance line whenever the S&P crosses it. After crossing it again, it has become a resistance line. This is helpful for multiple reasons. To consider a breakout from a trend line a true breakout, it needs to retest the line at least once. This goes for a broken support line and resistance line. This makes sense because last weeks highs often become this week’s support. Also, it helps to establish the long term nature of a trend line if the price has on multiple occasions touched the line, and on one or two occasions it has crossed it and retested it.
Sometimes I will intentionally draw trend lines through candles if it looks like a break out. On the chart, the signs of a breakout are very quick, steep price movements and large jumps in volume following a volume contraction. If the stock crosses the line over and over again within a short time period, chances are it doesn’t make a good trend line.
5. Connect the trend line to as many points as possible. There is no reason to stop drawing a line once it touches 3 points. If it can clearly connect more points than 3 go ahead. The longer the line the better, because it is more credible as a long term trend.
6. Connect the highs with the highs and the lows with the lows. This Is how you form clear trends. However, as I mentioned previously, you might want to connect last week’s highs with this week’s lows.
Feedback is appreciated.
2. Keep it simple, but not too simple. As tempting as it may seem, we really don’t need to draw four or five lines to get our point across. However, one trend line by itself is too simple, and only semi-useful. In most cases you will be able to find at least three or more different trend lines in the short, medium, and long-term. In the case I have too many lines drawn, I generally pick 2 or 3 that I feel are crucial and delete the rest. One trend line is acceptable in cases where you feel like the evidence lies in other indicators. These indicators can be relatively simple, such as moving averages or RSI, or semi-complex such as Fibonacci lines or MACD. Whatever the case, the idea is to make your chart helpful and useful (while also being clear and concise.)
3. A trend line should generally touch three or more points on the chart. Two is acceptable when there is a clear trend but sometimes the lows/highs get close to the line but don’t necessarily touch it. If you look for trend lines in the RSI too, it will most often be the case that there is a trend the trend lines can only connect two points without cutting through another line on the chart. As long as you get the point across, people will generally cut you some slack.
4. It is (sometimes) ok to have your drawn lines cut through the price movements. For example, I did this on the S&P chart to signify that the trend line that was previously a support line has become a resistance line whenever the S&P crosses it. After crossing it again, it has become a resistance line. This is helpful for multiple reasons. To consider a breakout from a trend line a true breakout, it needs to retest the line at least once. This goes for a broken support line and resistance line. This makes sense because last weeks highs often become this week’s support. Also, it helps to establish the long term nature of a trend line if the price has on multiple occasions touched the line, and on one or two occasions it has crossed it and retested it.
Sometimes I will intentionally draw trend lines through candles if it looks like a break out. On the chart, the signs of a breakout are very quick, steep price movements and large jumps in volume following a volume contraction. If the stock crosses the line over and over again within a short time period, chances are it doesn’t make a good trend line.
5. Connect the trend line to as many points as possible. There is no reason to stop drawing a line once it touches 3 points. If it can clearly connect more points than 3 go ahead. The longer the line the better, because it is more credible as a long term trend.
6. Connect the highs with the highs and the lows with the lows. This Is how you form clear trends. However, as I mentioned previously, you might want to connect last week’s highs with this week’s lows.
Feedback is appreciated.