Learn the Stock Market Lesson — Uptrends, Downtrends, and Trendlines
What are uptrends and downtrends?
Uptrend pattern:
- Each rally reaches a higher point than the preceding rally.
- Each decline reaches a higher point than the preceding decline.
(higher highs and higher lows)
Downtrend pattern:
- Each decline stops at a lower point than the preceding decline.
- Each rally stops at a lower level than the preceding rally.
(lower lows and lower highs)
What are trendlines?
Trendlines are lines that connect nearby bottoms or nearby tops, which are used to identify trends. The most important trait of a trendline is its angle, or slope, because it identifies the dominant market force.
Uptrendline:
- A line that connects 2 or more nearby bottoms and slants upwards.
- Bulls are in control. Look for buying opportunities.
- If we draw a line parallel to it across the nearby tops, it will mark a trading channel.
Downtrendline:
- A line that connects 2 or more nearby tops and slants downwards.
- Bears are in control. Look for shorting opportunities.
- If we draw a parallel line across the nearby bottoms, it will mark a trading channel.
Trading range:
- The lines connecting the tops and the lines connecting the bottoms are not slanting upwards nor downwards – the lines are close to the horizontal.
- We can either wait for a breakout to step in or trade short-term swings within that range. (Beware of false breakouts)
- Often referred to as “trendless”
Techniques
It is better to draw trendlines across the edges of congestion areas instead of price extremes because extreme points reflect panic only among the weakest crowd members. The breaking of a trendline is one of the warnings of a trend reversal.
A trendline is also more important and valid if:
1- It’s over a longer timeframe. A trendline on a weekly chart is more important than a daily trendline.
2- The trendline is longer in length. A short trendline reveals mass behavior for only a short period of time whereas a longer one reveals mass behavior for a longer time.
3- There is more contact between the price and trendline. A trendline that is only beginning to form only touches 2 points. More points of contact makes the trendline more valid.
4- Increasing Volume. When prices move in the direction of a trendline, an increase in volume confirms that trendline.
Real Life Example:
Uptrend:
