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 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.

Soho Primary Uptrend 2009
Soho Primary Uptrend 2009

TeleChart2007  chart courtesy of Worden Brothers, Inc.

Ticker:SOHU April 2009 Up Trends

  1. To evaluate an upward trend draw a line joining the highest highs
  2. 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.
  3. A trend line is drawn to show that price has moved strongly past the previous high this is a BUY Signal at $35.50.
  4. 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 share 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.

how to draw trend lines

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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Other Chapters of the Liberated Stock Trader Book are listed below

Chapter 1 – Essential Stock Market Knowledge – Fundamentals

This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics

Chapter 2 – What Really Moves Markets - Why do Booms and Busts Occur?

This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.

Chapter 3 – How do markets move ? - Stock Market Cycles – Business & Economic Cycles – Kondratieff to Kuznets

What are stock market cycles and the cycles of business and economies.  Important information that you need to appreciate as part of your core analysis.

Chapter 4 – Is the Company in great shape – P/E Ratio

Next we move into fundamental analysis and the financial fitness of a company.  All the major indicators and measures are covered.

Chapter 5 – How to find the best stocks

Stock screening means using criteria to short list the kind of stock that you want to purchase.  A vital part of any stock market training

Chapter 6 – Chart Reading made easy - Japanese Candlesticks – Bullish Reversal Patterns

Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy.  The next thing to do is the technical analysis.  Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out.  This is called catching a falling knife.  This is what chart patterns and technical analysis helps with.

Chapter 7 – Trend Lines and Price Patterns - How to draw trend lines

Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last.  Vital for you to establish buy and sell signals.

Chapter 8 – Chart Indicators are your friends ! – ROC Rate of Change Indicator

Which indicators should you use, there are literally hundreds of stock chart indicators.  Each have a specific use case and application, which should you use?

Chapter 9 – Chart Indicators Volume - The Price Volume Relationship

Volume is a vital indicator along with price.  Both of these you need to understand in granular detail, you will learn everything you need to know.

Chapter 10 - Advanced Stock Charting Techniques Parabolic SAR

Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.

Chapter 11 - Sentiment Indicators & Trading the News - How to trade the news

How are the market participants feeling?  Positive, Negative or indifferent.  Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator.  Lean how to use them to your advantage.

Chapter 12 - Trading Strategy - What type Of Investor are you?

Understanding how you want to invest, how much time you have and your time horizon.  These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you.  Then we move on to building your stock investing system, a critical element to your plan.