Trend line – a tool that allows the trader to determine the current trend in the market.
It is worth recalling that the trend is the direction of the price movement of the financial instrument in question.
As we already know, there are three types of trends:
- An uptrend, or as it is also called by traders “bullish”. The association with the bull occurs for the reason that the bull as if pushing the price from below upwards with his horns, and prices are constantly rising.
- It is either downtrend or “bearish”. This animal paws at prices from the top down and prices are falling all the time.
- Side trend or “flat”. In this case there is no explicit price movement, and the chart seems to move in a corridor.
Bulls and bears is U.S. stock exchange slang. Bulls are buyers (they open sell positions). When there are more of them than sellers, prices go up. It is as if a bull is pushing prices up. Bears are sellers. When there are more of them, prices go down. It is reminiscent of a bear pawing. Costs go down, the chart moves down.
What is necessary to recognize an active trend in the market? Exactly for this purpose were created trend lines, which give visibility to charts. In order to identify an uptrend, it is necessary to find a sequence of higher highs and higher lows on the chart. The line that passes through the lows is a trend line. It is also called a support line, because when prices reach it, they find support there, break away from it, and start rising again.
The trend line also has another important function – it helps identify when a trend break occurs, with prices breaking the trend line from above to below in an uptrend and from below to above in a downtrend.
To identify a downtrend, you need to find a sequence of lower highs and lower lows on the chart.
The line that passes through the highs forms the trend line. It is also called the resistance line, because when prices reach it, they find resistance, break away from it, and start to fall again.
Finally, in order to determine a sideways trend, it is necessary to find a period on the chart, when the price has no definite direction of price movement. The resistance line on one side limits the growth of prices, and the support line keeps prices from going down. This period is very useful for traders, because after the exit of prices from a sideways trend, there are strong price fluctuations, from which you can extract a solid profit.