A trendline is not only the depiction of market direction but also tells us about valuable information on supports and resistances, charting patterns, and psychology of the market.
The trend has a different meaning to different traders. One with a long-term approach will not pay much attention to small corrections but an intraday or position trader might consider this correction as a downtrend and act accordingly.
There are two types of trendlines – a tentative trendline and a valid trendline. A tentative trendline is just a trend line, which is formed by connecting two lows or two highs. On the other hand, a valid trend line is the one, which is formed by connecting three or more touchpoints.
So, here, we have tried answering some of the common questions about trendline:
How do we benefit from a trendline?
Well, the use of a valid trendline is more beneficial when the price breaks its valid trendline. It is more justifiable to take trades based on this approach as the confirmation of a breakdown or a breakout is more significant here.
How to determine the significance of a trendline?
The longer a trendline stays the same or the more times prices touch it, the more important it becomes. If a trendline has been around for a while and prices keep respecting it, that’s a good sign.
How to handle small trendline penetrations? Sometimes, prices will violate a trendline on an intraday basis but then, closes in the direction of the original trend, leaving the analyst in doubt. What to do in such cases?
If prices cross a trendline for a little while but then go back to where they were before, it’s best to keep the original line and draw a dotted line to the new point. This helps us see which line is more correct. Sometimes, small crossings don’t matter much.
What constitutes a valid breaking of a trendline?
As a general rule, a close beyond the trendline is more significant than just an intraday penetration.
What is the psychology behind a trendline?
One of the basic concepts of the trend is that a trend in motion will tend to remain in motion. In an uptrend, buyers are always found at the support. If the price breaches the support, it indicates that buyers are no longer interested in holding their positions as selling pressure exceeds the buying. And those buyers who are already in profit will tend to square off their positions, creating more selling pressure in the stock price, confirming a breakout. Thus, trendlines play a significant role in trading.
So, if you had questions about trendlines, we hope we’ve helped answer them!