Because trends persist for long
periods, a position taken with the trend will more likely be
successful than one taken randomly or against the trend. Trading with
the trend in a bull market means buying on dips; in a bear market,
selling on rallies.
On a bar chart, each vertical line connects the day's, week's, or
month's high and low. The horizontal tick to the right of the line
indicates that time period's closing price.
A trend is easily spotted on a bar chart. An uptrend is a series of
higher lows and higher highs. Uptrend lines are drawn under the lows
of the market and give support. A downtrend is a series of lower lows
and lower highs. Downtrend lines are drawn across the highs and give
resistance to the market. The soybean chart shown below has both
uptrend lines and a downtrend line.
A trend line can be drawn when two points are
available. The more times a trend line is touched, the more
technically significant this support or resistance line becomes.
While some chartists draw trend lines through lows and highs, others
may prefer drawing lines through closes in hopes of detecting a change
in trend more quickly.
Trend lines may change angles, requiring another line drawn through
new high or low points. For example, the sideways trading action in
March and April broke the steeper uptrend line connecting the Feb. 13
and March 20 lows. But when the uptrend resumed in early May, a more
shallow uptrend line can be drawn connecting the February and
late-April lows.
The most reliable trend lines are those near a 45° angle. If about
four weeks have elapsed between the two connecting points, this
increases the trend line's validity. However, steep trend lines that
don't fit these guidelines, like the uptrend line in the early portion
of the soybean chart, may be just as useful.
Often, minor up trends or downtrends will
confuse the beginner. It may seem the market has turned around.
However, sharp chartists will see these minor trends as small ripples
within a major wave. Remember, if the trend line isn't broken, that
trend remains intact. Two closes outside the trend line are the
criteria for detecting a change in trend. However, very seldom do
markets go directly from uptrend to downtrend. At the end of a move,
traders become less aggressive and prices may swing in a sideways
pattern or consolidation period.
Many times, markets break into an uptrend or downtrend out of a sideways
trading pattern or consolidation period. In the soybean chart, prices
traded in a 50<f range for nine weeks before breaking the resistance
level and beginning a short move up. As a general rule, the longer the
consolidation period, the greater the rally after the breakout.
Because traders need time to be convinced that they
should put their money into the market, sideways patterns are more
likely to occur near the bottom of a move. The beginning of a
downtrend often will be sharp and sudden as investors pull money out
of the market.
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Another way beginners might be fooled is
seeing false breakouts of tops and bottoms. As prices begin to make
their move in switching from a downtrend to an uptrend, traders with
short positions will "cover." This buying many times will cause the
market to rally above the downtrend line. This short covering rally
seldom holds, and prices may drop back to the breakout point. The
uptrend is confirmed when prices close above the high of the short
rally.
On a topping formation, long liquidation takes prices through the uptrend
line on a short break. Before the downtrend begins, the market
sometimes rallies back to "test" the uptrend line as shown on the
soybean chart in September. As the downtrend unfolds, the second
reaction rally could not top the highs of the first rally.
Channel lines are an extension of the trendline theory. The October
through January downtrend on the soybean chart shows prices staying in
a "channel" between the downtrend line and a line drawn parallel to
it, connecting the lows. A channel line in a downtrending market helps
identify where support may be found.
Speedlines are another line which show where
prices may find support or resistance. Frequently, speedlines and
trendlines will overlap, emphasizing that line's importance to the
market.
In identifying the trend in a market, it is wise to
start with the longer term charts to identify the long-term trend. The
daily charts offer trends for the shorter-run. |
