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Volume IconHow can trendlines help traders catch that perfect breakout?

If you have been following technical analysis in financial markets, you must have come across the word 'trendline'. But what is it? When should you plot them? How reliable they can be? Let's find out

stock markets

Trendlines are the lines that traders draw on charts to connect a series of prices together. The resulting line is then used to give the trader a good idea of the direction in which an investment’s value might move.
It indicates a broad trend, especially when considered on a bigger time scale and also aids in developing a trading strategy. 

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To draw a trendline, one considers the ‘lower lows’ in terms of support and ‘higher highs’ as resistance points to identify the next influential level. This could take a horizontal form as well. 

Day-traders consider the trendlines as a support or resistance on the chart. Any breach of the same signals a major turnaround in the sentiment and thus affects the price movement.

The trendline is among the most reliable tools that technical analysts used. Technical analysts believe the ‘trend is your friend’, and identifying this trend is the first step in the process of making a good trade.

While trendlines provide relevant information about the trend; in a short time-frame, it may reflect wild swings. Therefore, trendlines help in identifying medium-to-long term view.

In case of short-term trades, trendlines need assistance from the volume parameter. 
Lastly, these play a significant role in chart formations – such as, the Rising channel pattern, Falling channel pattern, Ascending triangle, Symmetrical triangle and Descending triangle.

Now that we have established the meaning and reliability of trendlines, let’s understand when should use trendlines for stock analysis?

One should look out for trendlines if the stock or the index that he/she is tracking is in an extremely bullish phase. Besides, one can use trendlines if the same has been consolidating for some time. 
Similarly, cases where the stock starts scaling highs without intermittent corrective moves or sees rising volume without any volatility in the price, merits a look at trendlines.
 
Finally, here are some quick tips on how to trade with Trendlines?

Firstly, as and when a stock or index breaks the trendline, volumes need to surge.  Further, follow-up buying or a decisive close of the candlestick that showed a breakout needs to be there to confirm the trend. Thirdly, referring to technical oscillators like the overbought and oversold conditions can be helpful. Finally, trader should consider the highest high or the lowest low during the last two trading sessions as the Stop Loss.

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First Published: Oct 26 2022 | 7:00 AM IST

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