One you understand the basics of reading a stock chart, the next thing you need to learn is how to draw a trend line. If you aren’t confident in your ability to read a candlestick chart, check out this blog FIRST.
What is a trend line?
A trend line is a line drawn over pivot high points or under pivot low points, connecting these points so as to form a “trend” for which direction a stock is moving over a period time.
The best way to demonstrate this is visually.
In the chart above (Starbucks, 1day bars, 2/19 – 3/19), the blue line is the trend line. Starting at the bottom of the bars (for an upward trending line), you see a number of points (blue arrows) where the bars touch the line (or nearly — perfection is NOT required) but you don’t see any of the bars dipping below the line. This trend line is definitely reasonable for the time frame we are looking at.
As we extend the timeframe forward, we see that the trend line holds until the red bar on April 16th (see the blue arrow). At that point our trend line is no longer representative of the data and we need to create a new line.
Maybe we wait a couple of days and see that the upward trend is still viable, but the slope needs to be adjusted to the new purple trend line. We see that several of the new lows (purple arrows) match up with this line and that this trend goes out for another 3 weeks, until it too breaks below this trend line (blue arrow).
Now let’s take a look at a negatively sloped trend line:
Instead of looking at the bottoms of the bars, when we are drawing a negative trend line, then we need to look at the high pivot points. With this chart (American Airlines, 1hr chart, 3/11/2020 – 5/15/2020), we can easily connect the top two points, but we notice that there is a lot of variability below the line. There is nothing wrong with this and the smaller your time bars, the more variability you are likely to see. Regardless of the time scale though, you’ll notice that the stock is generally trending downward, even though it is often well below the blue trend line. You’ll notice that the third high pivot point happens to hit directly on the trend line that we drew.
The market is not as random as you might think.
And trend lines can help you assess which direction a stock/ETF or index is truly moving in.
Take a look at this video for some more “live’ examples of drawing trend lines.
If you are more into trading as opposed to investing — or if you are just interested in learning a little more about trend lines, take a look at the following video:
Take home points:
- The point of a trend line is not to cover any and every change in the market. If that was the case, then we might as well draw a horizontal line across the bottom — at least for most stocks, that would cover all of the variability.
- Perfection is not required. You don’t have to find the “perfect” line. If you had a room full of seasoned stock traders, you would find many different trend lines drawn; they would be similar, but have different peaks picked, or have slightly different slopes.
- Upward trend lines start from the low pivot points.
- Downward trend lines start from the high pivot points.
So now that you know how to draw a trend line, what do you do with it? Check this out next.
Here are a couple useful links that you might enjoy:
✅ If you like the look of the charts that I used in all of my examples, these are real-time charts that are offered free through this link: TradingView
✅ If you are interested in a great trading platform where you can get two free stocks just for opening and despositing $100, check this out: WeBull
✅ Interested in learning more about Coach John? Read his story HERE.