Trend Lines

One of the most commonly used techniques for determining future price action is the use of trend lines. A trend line connects points on a chart which creates a line, that has a slope that when breach generally continues in the direction of the trend line break.

chart

In the chart above, trend lines are drawn that are upward sloping and downward sloping. Upward sloping trend lines are generally drawn from using multiple low points while downward sloping trend lines are used drawing multiple high points. The more points that are used to draw a trend line the more robust the trend line is for evaluating break outs.

For example, in the chart above, a downward sloping trend line that connects the highs in June to the highs in July was breached in August (green arrow), which led to higher prices.

There are some ways to generate objective trend lines although generally these methodologies are considered subjective. Tom DeMark introduced a technique were trend lines are drawn by connecting a high that is surrounded by one lower high on each side to the next higher high that is surrounded by lower high on each side of it. The connection of the two highs price points generates an objective trend line. The same holds true for upward sloping trend lines. A low that has two higher lows connects to the next low with two higher lows generating an upward sloping trend line.