Trend lines are very often used in the analysis of market price movements. The purpose of the trend line is to find out the points of support in an uptrend or resistance points in a downtrend. As previously explained, the ability to identify a trend is one of the key factors in technical analysis studies. Maybe you often hear the phrase "Trend is your friend" or "Never fight the trend".

But what is a trend? Trend is one of the three basic points of thought in technical analysis, namely: Prices move in trends. In short, a trend can be defined as a trend toward the direction of price movements in a market.

In Dow Theory it is said that there are three types of trends, including: Uptrend (the tendency for prices to rise). Downtrend (the tendency of prices to fall) and Sideways (the tendency of prices to sideways/fixed).

Sideways are also often referred to as trendless or not having a trend. However, the price of a stock certainly does not move "constantly up" or "continuously down", but up and down repeatedly so that it forms a zigzag movement.

In this zigzag movement there are various tops and bottoms that can be provides a reference in determining the trend direction. In an uptrend pattern, the peak and bottom formed are getting higher and higher.

In a downtrend, the peak and bottom formed are getting lower and lower. While in the sideways pattern, the peak to the top and bottom to the base formed (almost) the same.

The three main characteristics of a trend line are: The more price points that are connected, the more valid and stronger the trend line will be to hold support or resistance points in the next test. The more valid a trend line, the more attention and obedience by market participants will be. The steepness of the trend line can be used as a reference to identify bullish market conditions (if it is steep to the top) and bearish (if it is steep to the bottom).

TREND LINE

The trend line or trendline is a line that serves as a guide to show the direction of the trend. This trendline is formed from a line that connects certain points in the history of price movements in a chart.

 How to Draw Uptrend Lines

To create an uptrend line, here are the steps:

·         Determine the lowest price point (low level).

·         Draw a line to the next lowest price point.

·         Extend the line in anticipation of the next support (or resistance) points.

Anticipation steps in the third stage are the most important in making trend lines

How to Draw a Downtrend Line

Using the same method as the previous trend line, for bear market conditions, a downtrend line can be drawn which anticipates resistance points in the future.

·         To create a downtrend line, here are the steps:

·         Determine the highest price point (high level).

·         Draw a line to the next high price point.

·         Extend the line to anticipate the next resistance points.

Please note that the highest (downtrend) or lowest (uptrend) price point to start is the point where the price movement begins to move downwards or upwards. Adjust the slope of the trend line until it touches the highest or lowest price level on the candlestick bar.

Extend the downtrend line to the right so that it passes through several highs of each candlestick bar. The slope of the downtrend line can be adjusted to help identify resistance points. The downtrend line doesn't have to be exactly at the highest price point, but it can be adjusted as long as it doesn't deviate too far.

The first high or low price point should not be changed because it is the starting point for the start of the downtrend line. Extend the downtrend line to the right to anticipate resistance price points in the future.

HOW TO USE THE TREND LINE

Seen in line a trendline requires at least two connecting points. However, the trend line is still tentative because it takes a third "test" for a trendline to be declared valid. A trendline is declared to be stronger the more often it is tested.

For example: A trendline that has been tested seven times will tend to be stronger than one that has only been tested twice.

From Newton's Law of Movement, it can be interpreted that if there is a directional trend in the movement of stock prices (trend), then there is a greater possibility for the trend to continue than not. 

So it can be concluded that a trend that is moving within a certain slope tends to continue on the same slope as depicted by a trendline. If the trendline is broken, it can be an important early signal that the trend may change direction.

If an up-trendline has been formed, besides being a guide to determine buy signals, the trendline can also help in determining sell signals or liquidating previously purchased shares, i.e. if the price movement breaks the trendline. And vice versa with the down-trendline

TREND LINE BREAK

It was said earlier that if the trend line is "broken" then it can be an important initial signal that there is a possibility that the trend will reverse.

The problem is, how to make sure a trendline has been broken or not? Because sometimes the price can temporarily break through a trendline in the movement per minute of the day (intraday), but the closing price returns to the trendline, leaving technicalists in doubt whether the trendline has been broken or not?

As a rule of thumb, please note that a trendline has been declared a valid break if the Closing price is outside the line, because the closing price is much more important or significant than the temporary intraday movement.

Temporary breakouts by intraday price movements are referred to as false breakouts or whipsaws.

To see the long-term trend, trend lines are drawn on large time frames, usually daily or weekly. As for the medium term, trend lines can be made on 4-hour or daily time frames. Especially for short-term trading, the 1-hour time frame and below is recommended as the most appropriate chart for making trend lines.

Because of these rules, the time frame for drawing trend lines can be adjusted according to the trading period used. Long-term and medium-term traders (swing traders) often refer to the daily time frame, while short-term traders refer to the 5-minutes to 1-hour time frame.

However, it should be noted that the determination of the time frame also has an impact on accuracy. Accuracy means validity, which in this case means the possibility that the trend line is valid and can be adhered to in the future.

The noise factor or signal error often occurs in small time frames. That is why, the accuracy of trend lines drawn on small time frames (eg 1-minute) will be very low. The trend line on the 5-minute time frame drawn today is not necessarily valid for two or three days later.

 

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