Motilal Oswal Securities
A trend line is connecting consecutive tops or bottoms. It is formed by drawing a diagonal line between two or more price pivot points. They are commonly used to judge entry and exit investment / trading timing.
Trend line is a bounding line for the price movement of a security or an asset class. A support trend line is formed when price decreases and then rebounds higher at a pivot point that aligns with at least two previous support pivot points. Similarly, a resistance trend line is formed when price increases and then rebounds lower at a pivot point that aligns with at least two previous resistance pivot points. The following chart provides an example of support and resistance trend lines.
Trend lines are typically used with price charts however they can also be used with indicators such as MACD and RSI. Trend lines can be used to identify positive and negative trending charts, whereby a positive trending chart forms an upward sloping line when the support and the resistance pivots points are aligned, and a negative trending chart forms a downward sloping line when the support and resistance pivot points are aligned.
When establishing trend lines, it is important to choose a chart based on a price interval period that aligns with your trading strategy. Short term traders tend to use charts based on interval periods, such as Hourly, Daily and maximum to weekly, while longer term traders using price charts based on Daily, Weekly and monthly interval periods.
There are three basic kinds of trends:
• An Uptrend where prices are generally increasing over a period of time :
Example – Daily chart of Jublfood where support trend line is connected by its swing lows of 1190, 1235 and 1382 marks.
• A Down trend where prices are generally decreasing over a period of time.
Example : Daily chart of Tata Motors where resistance trend line is connected by its swing highs and prices are falling down after testing all the supply points.
• A Trading Range when prices move in a range or in a trading boundary.
Example: Weekly chart of Ibulhsgfin where it keeps on moving in between support and resistance trend lines
Disclaimer: The author is Associate Vice President | Analyst-Derivatives at Motilal Oswal Securities. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.