Mar

Chapter 7 – How to draw trend lines

This is an excerpt from the Liberated Stock Trader Academy Book and Training Course. Chapter 7, Section 2.

Drawing trend lines is one of the most important skills of a technical analysts, trend lines represent important areas of support and resistance. Once you have this skill, charts come to life and start to signal their message to you.

Follow the four simple steps below to begin drawing your first trend lines.

TeleChart2007 chart courtesy of Worden Brothers, Inc.

Ticker:SOHU April 2009 Up Trends

To evaluate an upward trend draw a line joining the highest highs
For the floor of the uptrend draw a line connecting the lowest lows. The price here bounces 3 times off the bottom line but then proceeds higher.
A trend line is drawn to show that price has moved strongly past the previous high this is a BUY Signal at $35.50.
Finally the price is exhausted and falls through the bottom resistance line at $51. This break of the upward support line is a sell signal.

Quick Tip: The more bounces off a trend line the stronger the trend.

Buying and selling based on the trend lines shown here would have bagged you a 49% win. Alas life is never that easy and showing this in retrospect does mean we have the benefit of hindsight.

Practice drawing your own trend lines.

It is very important you practice drawing trend line as much as possible, after a while you will get used to it and it will become second nature.

Here is another example of how to draw trend lines. This is a chart of Ticker:AAPL Apple Inc. it shows how to draw trend lines in a downward price move and an upward price move.

TeleChart2007 chart courtesy of Worden Brothers, Inc.

Practice drawing trend lines Ticker:AAPL Apple Inc

Notice that the trend line above the price is called resistance and the trend line below price is called support. When price breaks up through resistance it moves higher, this could potentially be a buy signal. When price breaks down through support it moves lower, this could potentially be a sell signal.

Quick Tip: The longer the trend line is in place or acts as support or resistance, the stronger the trend and the bigger the move when the trend line is broken.

Look again at the chart of Apple Inc. See how Apple was in a sideways consolidation from 2001 though to 2004. When it eventually broke out of that channel upwards through resistance the stock took off making over 1600% gain.

Chapter 7 delves deeper into technical analysis to enable you to make Buy and Sell decisions using trend lines, spot the most important patterns and trends, discusses the important of Price Gaps, Triangles and Wedges.

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