How To Measure The Strength Of A Trend With Trendlines-

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How To Measure The Strength Of A Trend With Trendlines- Powered By Docstoc
					A trend is formed when the price action shows steady higher highs or lower lows. In
case of steady higher highs, it is an uptrend and in case of steady lower lows, it is an
uptrend. One of the easiest ways to find the direction of the trend is to connect the
higher highs or lower lows with a line. This line is known as the Trendline.

Drawing a trendline is a subjective thing. So don't expect the trendline drawn at an
angle of 45 degrees to be right and another one drawn at the angle of 47 degrees to be
wrong. Keep this in mind that trendlines aren't perfect and can touch prices.
Sometimes, the trendline can only be drawn through price areas.

However keep these basics of drawing trendlines when you draw them.

1) A trendline should touch at least three different price points to be valid.
2) The more times a trendline is touched, the stronger the support and resistance of
that line.
3) The longer the trendline, the more staying power it will have.

How to draw Uptrend lines? Uptrend lines are drawn by connecting the lows in the
price action. An uptrend line indicates the rate of ascent that the buyers maintained
over a certain period of time.

Uptrend line has an important characteristic. They represent the support for the bulls.
Once an uptrend line is breached successfully by the price action, this support turns
into resistance. You can enter a trend by going long at the trendline with a stop loss
placed just below the trendline.

On the other hand, Downtrend lines are drawn by connecting together a series of
peaks or high in the price action with a line. Just like uptrend lines, downtrend lines
are more meaningful the more they are touched and the longer are in effect. You may
also find horizontal trendlines. Horizontal trendlines are ideal for the Darvas Box, a
system that Nicholas Darvas had used to make $2.5M in just 18 months starting with
only $25,000 in early 1960s.

A break in the trendline should not be taken as a signal that the trend is about to
change and reverse itself. You need to confirm this with candlestick patterns like a
hammer or a hanging man or the bullish or bearish engulfing candlestick patterns. In
the last decade, candlestick charting has become highly popular with the traders. You
will now find candlestick charts on almost all trading software. Master candlestick
charting and see how powerful this combination of trendlines and candlestick patterns
can be.

				
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posted:1/23/2011
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