Using The Trend Line As A Support And Resistance Level
Many technical analysts use trend lines to take trades. Learn more about how trend lines are used to spot trading opportunities. Trend lines are something that most technical analysts use to spot the support and resistance levels. This is another way you can look at the levels to enter and exit the stocks.
How to plot trend lines
Plotting trend line is an art and every trader would be plotting different trend lines. This means that every trader would be drawing a different trend lone to take trades. The method to draw the trend line, however, has to be the same. What makes the difference is the point that every trader chooses.
The trend line is drawn by taking two points on the candles. So basically two candle tops or two candle bottoms are taken and the trend line is connected between them. Then the trend line is extended and it is seen if it touches another candle top or bottom respectively.
If the trendline touches three candles top or bottoms then this confirms the trend line. Now the trader will use it as a support or resistance level.
Trading the trend line
You join two candle tops and extend the line. When it touches one more candle top then the trendline gets confirmed. Now, this is the resistance level of the stock. When the stock touches this trend line in the future then that level is an area of supply and you either get out of the trade or short the stock here.
You could also use the trend line as a demand zone. You take two candle bottoms and then extend the line further. If it touches another candle bottom then that confirms the trend line. When the candle touches the trend line again you can use it as a demand level. This is where you enter the stock and buy it.
There could be biasedness involved
There is no one method to draw trendlines. Thus at time biasedness starts to creep in when you draw trend lines. Many traders try to force the trend lines to take trades. This is something that should not be done. The rule is that you join two points and then extend it. If the line touches another candle top or bottom then that confirms the trend line. If a candle goes past then the trend line stands to be void.
Follow the rules and take trades without forcing any trade.